USD/JPY Daily Forecast: Dovish Fed Expectations Could Drive USD/JPY Toward 140

On Wednesday, August 21, trade data from Japan will put the Japanese economy and USD/JPY under the spotlight.

Trade Terms Signal Improving Demand

Economists forecast exports to increase by 11.4% year-on-year in July, after an increase from 5.4% in June. Additionally, imports rose by 14.9% year-on-year, following a 3.2% rise in June.

Sharp increases would signal a strengthening demand environment.

With a trade-to-GDP ratio of about 50%, improving trade terms could boost the economy and Yen demand. Increased demand for Japanese goods and services could raise business confidence, possibly driving job creation and wage growth. Higher wages may fuel household spending and demand-driven inflation, potentially supporting a Q4 2024 Bank of Japan (BoJ) rate hike.

Positive numbers could push the USD/JPY down toward 144.500.

Bank of Japan and the Interest Rate Trajectory

Beyond the numbers, investors should monitor commentary from the BoJ. In August, BoJ Deputy Governor Uchida Shinichi dismissed speculation about further BoJ rate hikes. In an emergency press conference addressing the Yen carry trade unwind, he said,

“I believe that the Bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile.”

Similar remarks may limit the influence of the trade data on Yen demand. However, investor sentiment toward the Yen improved since the carry trade unwind.

Bloomberg TV Asia Pacific Chief Markets Editor David Ingles shared a Bloomberg chart showing net long positions for the first time since 2021, stating,

“Hedge funds have finally turned net bullish on the Japanese Yen.”

Neutral Rates Signal a Zero Interest Rate Differential Between Japan and the US

ARK Invest Founder, CEO, and CIO Cathie Wood recently commented on Treasury yields and the Fed Funds Rate, saying,

“The metal-to-gold ratio suggests that the 10-year Treasury bond yield should be around 2% today, not where it is at 3.8% or last October’s 5%. If the 10-year Treasury should yield ~2% today, should the Fed funds rate be closer to 1%?”

Moreover, the Bank of Japan’s Summary of Opinions revealed a projected neutral rate of 1%.

The prospect of a zero interest rate differential between Japan and the US has renewed hedge fund interest in the Yen. The USD/JPY could be on a long path back toward 100.

The last near-zero interest rate differential between Japan and the US was in the early stages of the COVID-19 pandemic. Before that, during the Global Financial Crisis, the FOMC established a near-zero target for the Federal Funds Rate in December 2008 (Target range: 0-0.25%).

US Economic Calendar

Later in the session on Wednesday, the FOMC Meeting Minutes will require investor consideration. Speculation about multiple 2024 Fed rate cuts has pulled the USD/JPY to 145.

Concerns about the US labor market and support for multiple rate cuts could affect US dollar demand. Comments on the size of a September rate cut may be crucial for the USD/JPY pair.

According to the CME FedWatch Tool, the probability of a 50 basis point September Fed rate cut was 24.5% on Tuesday, compared to 75.5% for a 25-basis point cut. A 50-basis point September rate cut could fuel speculation about a 100-basis point cut to the FFR in September, November, and December.

A more dovish Fed rate path may support a USD/JPY fall through 143.

Expert Views on the US Labor Market

Arch Capital Global Chief Economist Parker Ross remarked on the New York Fed’s latest Labor Market Survey, stating,

“Key Takeaway: There is growing concern about job loss and a corresponding decline in workers expecting to move to a new employer, particularly among workers aged 45 and under. The results of this survey are yet another reflection of how concerned consumers are about the labor market, even as the Fed has only recently declared it “balanced.”

A deteriorating US labor market may give the doves the upper hand, possibly supporting a more aggressive 50-basis point September rate cut.

Short-term Forecast: Bearish

USD/JPY trends will depend on trade data from Japan, upcoming services PMIs (Thurs), and central bank forward guidance. Positive data from Japan and support for a Q4 2024 BoJ rate hike could pull the USD/JPY below 143.  Weak data from the US and rising bets on a 50-basis point September Fed rate cut may signal a fall toward 140.

Investors should remain alert. Monitor real-time data, central bank insights, and expert commentary to adjust your trading strategies accordingly. Stay updated with our latest news and analysis to manage USD/JPY volatility.

USD/JPY Price Action

Daily Chart

The USD/JPY sat well below the 50-day and 200-day EMAs, confirming the bearish price trends.

A USD/JPY breakout from the 145.891 resistance level would support a move toward 147.500. A return to 147.500 could give the bulls a run at the 148.529 resistance level and the trend line.

Economic indicators from Japan, the FOMC Meeting Minutes, and central bank commentary require consideration.

Conversely, a drop below 145 could give the bears a run at the 143.495 support level. A fall through the 143.495 support level may bring the 141.032 support level into play.

The 14-day RSI at 31.65 suggests a USD/JPY break below 145 before entering oversold territory.