USD/JPY Forecast: Economic Indicators Shift Focus to BoJ’s Monetary Policy

Will Japan’s economic data lead to major changes in monetary policy, or will the Bank of Japan stay the course?

USD/JPY Advances as Japan’s Economic Data Looms

The USD/JPY increased by 0.67% to 160.835 for the week ending June 28. It fell to 158.740 on Monday but reached a high of 161.283 by Friday.

Consumer Confidence and Economic Context

On Monday, July 1, Japan’s consumer confidence numbers might affect demand for the USD/JPY. Economists predict the index will rise from 36.2 to 36.5 in June.

Upward trends in consumer confidence could signal a pickup in household spending and demand-driven inflationary pressures. With the Yen in the intervention zone, better-than-expected stats could incentivize the Bank of Japan to discuss rate hikes.

For context, the Consumer Confidence Index weakened in April and May after reaching a 2024 high of 39.1 in February. Noticeably, consumer confidence reflected the broader macroeconomic environment. The Japanese economy contracted by 0.5% in Q1 2024, with private consumption falling by 0.7%.

Other stats on Monday include finalized manufacturing PMI numbers for June. However, these will likely play second fiddle to the consumer confidence numbers and finalized services PMI numbers on Wednesday.

The Bank of Japan relies on consumer spending and services to fuel demand-driven inflation.

Will service sector data indicate a challenging second quarter?

Service Sector Economic Indicators a Bug Bear

On Wednesday, Tankan survey-based figures for Q2 2024 will likely draw the attention of the BoJ. With services in focus, the Tankan Large Non-Manufacturing Index could influence the USD/JPY more.

Economists forecast the Tankan Large Non-Manufacturing Index to fall from 34 to 33.

Moreover, investors should consider revisions to the preliminary Jibun Bank Services PMI. According to preliminary numbers, the Services PMI slid from 53.8 to 49.8 in June. A more significant contraction could challenge expectations for a July BoJ rate hike.

Despite a possible contraction across the services sector, can household spending bolster the case for a July BoJ rate hike?

Household Spending and BoJ Policy

On Friday, July 5, household spending figures wrap up a crucial week for the Japanese Yen and the BoJ.

Economists forecast household spending to increase by 0.5% in May after sliding by 1.2% in April.

Better-than-expected numbers might influence the July BoJ monetary policy decision.

Potential BoJ Monetary Policy Actions

Beyond the numbers, investors should monitor intervention threats and BoJ commentary. Concerns about the effect of a weak Yen on the Japanese economy could influence the government and the BoJ. Intervention or BoJ support for a July interest rate hike and aggressive cuts to Japanese Government Bonds could potentially push the USD/JPY towards 150.

Expert Opinions on BoJ Strategies

Last week, Finance Minister Shunichi Suzuki also talked about an intervention, saying,

“We would respond appropriately to excessive currency moves.”

However, Bruegel Senior Fellow Alicia Garcia Herrero believed monetary policy tools could be more effective, saying,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

Given these dynamics, investors should be mindful of potential downside risks for the USD/JPY. While economic indicators from Japan could send mixed signals, moves to bolster the Yen could materially impact the USD/JPY pairing.

Beyond the Japanese economic calendar, economic data from the US may also influence monetary policy intentions for the BoJ and the Fed.

Overview of the US Dollar Outlook

Meanwhile, it will be another pivotal week for the US dollar amidst ongoing speculation about a September Fed rate cut.

ISM Manufacturing PMI Expectations

On Monday, ISM Manufacturing PMI figures will garner investor interest. While accounting for less than 30% of the US economy, the numbers may influence investor expectations of a soft US economic landing.

Economists forecast the ISM Manufacturing PMI to increase from 48.7 to 49.0 in June. The PMI will unlikely influence sentiment toward the Fed rate path despite the likely interest. The services sector remains the focal point vis-à-vis the US economy and inflation trends.

Job Openings and Quits Data

However, JOLTs job openings and job quits could influence investor expectations of a September rate cut.

Economists forecast job openings to fall from 8.059 million in April to 7.850 million in May. Additionally, economists expect job quits to decline from 3.507 million to 3.500 million.

A sharp fall in job openings and quits could signal a weakening US labor market. Weaker labor market conditions might impact wage growth and reduce disposable income. Downward trends in disposable income could curb consumer spending and dampen demand-driven inflation.

On Wednesday, the US labor market will be in focus again alongside the all-important services sector.

ADP Employment Report and Jobless Claims

Economists predict the ADP to report a 170k increase in employment in June after a 152k rise in May.

Additionally, economists forecast initial jobless claims to increase from 233k to 235k in the week ending June 29.

A less marked increase in the ADP numbers and a sharper rise in jobless claims could fuel speculation about a September rate cut.

Importance of ISM Services PMI and Sub-components

However, investors should consider the ISM Services PMI and its sub-components. The services sector accounts for over 70% of the US economy and remains a driving force behind inflation.

Economists forecast the ISM Services PMI to fall from 53.8 to 52.5 in June. Furthermore, economists expect the ISM Services Prices Index to drop from 58.1 to 57.8.

Slower service sector activity and softer input price pressures would support investor expectations of a September rate cut.

Will the US Jobs Report Solidify Expectations of a September Fed Rate Cut?

Friday could be a critical day for the US dollar, with the crucial US Jobs Report in the spotlight.

Weaker wage growth, an unexpected rise in the US unemployment rate, and a less marked-than-expected rise in nonfarm payrolls could sink the USD/JPY. Forecasts are as follows:

• Average hourly earnings to increase 3.6% year-on-year in June after rising 4.1% in May.
• Nonfarm payrolls to rise by 180k (May: +272k).
• US unemployment rate: 4% (May: 4%).

Last week, Arch Capital Global Chief Economist Parker Ross reacted to recent US jobless claims trends, stating:

“Continuing claims of 1,839k (sa) surprised more meaningfully to the upside for the week ending June 15 (1,828k cons) but was just above my estimate of 1,835k. […]. Continuing claims still reflect a more substantial softening of the labor market.”

The jobless claims data for the week ending June 22 suggested a higher unemployment rate.

The Federal Reserve: FOMC Meeting Minutes and Fed Speakers in Focus

Beyond the numbers, the FOMC Meeting Minutes (Wednesday) and FOMC Member speeches also need consideration.

Fed Chair Powell is on the calendar to speak on Tuesday. Reactions to the US inflation numbers and views on the timing of a Fed rate cut could move the dial.

Short-term Forecast: Bearish

Near-term USD/JPY trends will depend on consumer confidence, service sector data, and household spending figures from Japan. While weak numbers could affect demand for the Yen, intervention threats and bets on a more hawkish BoJ could counter the data. Furthermore, US, services PMI and labor market numbers will be crucial data releases.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY break above the June 28 high of 161.283 could signal a move toward the 162 handle.

Investors should consider intervention threats, central bank chatter, and the respective stats from Japan and the US.

Conversely, a break below the 160 handle in USD/JPY could indicate a decline towards the 50-day EMA. A fall through the 50-day EMA could give the bears a run at the 151.685 support level.

The 14-day RSI at 73.05 indicates that USD/JPY is in overbought territory. Selling pressure could intensify at the June 28 high of 161.283.