US Dollar Outlook: USD/JPY Mired by Yields, Flash PMIs Due

• The US Dollar whipsawed on Thursday and helped the DXY Index reverse its -0.3% decline

• USD/JPY price action weakened as Treasury bond yields struggled to extend their rebound

• Flash PMIs scheduled for release tomorrow could weigh on risk trends ahead of the FOMC

US Dollar bulls and bears battled for directional control during Thursdays trading session only to see the DXY Index close practically flat. The broader US Dollar weakened as much as -0.3% at intraday lows, which seemed to track downward pressure on Treasury yields that followed disappointing weekly jobless claims data.

This dragged USD/JPY 17-pips lower on the session. The ECB decision weighed on the US Dollar too, albeit indirectly, with EUR/USD price action comprising 57.6% of DXY Index performance. That said, markets might look to upcoming event risk posed by the release of flash PMIs due Friday, 23 July for clues to where the US Dollar heads next.

Better-than-expected US PMI data might see the Dollar firm up some more – particularly if both employment and inflation components show signs of strength. This is considering how robust economic data stands to keep the heat on Federal Reserve officials with regards to their timeline for tapering asset purchases. On the other hand, if flash PMIs are reported below forecast, we could see the US Dollar gravitate lower as markets further unwind Fed taper bets.

It is worth noting that overnight implied volatility readings for the US Dollar look fairly muted. This suggests markets might stay choppy and rangebound tomorrow, which is a scenario that could be reinforced with relatively in-line flash PMI data. Looking to the week ahead on our Economic Calendar, though, we see there is a Fed rate decision due next Wednesday, July 28 at 18:00 GMT.

That could see measures of implied volatility creep higher over upcoming trading sessions. As such, staying nimble is likely prudent. Also, in light of this backdrop, I will be watching Treasury bond yields closely on Friday and throughout next week as a potential bellwether for the direction of USD/JPY price action given their generally strong direct relationship.