USD/JPY Forecast: 158 in View on Fed Chatter and Bank of Japan Silence

Interest Rate Differentials, Carry Trades, and the Bank of Japan

The Bank of Japan (BoJ) could influence buyer demand for the USD/JPY on Tuesday (May 21).

Speculation continues to grow about a June BoJ interest rate hike. However, on Monday (May 20), the USD/JPY extended its winning streak to three sessions. Interest rate differentials remain firmly in favor of the US dollar despite the expectations of the BoJ and Fed moving in opposite directions.

A June BoJ interest rate hike may not be enough to curb speculative moves against the Japanese Yen. Moreover, interest rate differentials will continue to expose the Japanese Yen to the effects of carry trades.

In carry trades, investors borrow Yen at low interest rates and use leverage to buy higher-yielding currencies like the US dollar, enhancing earnings while exerting selling pressure on the Yen.

The BoJ may need to project a significantly more hawkish interest rate trajectory to sink the USD/JPY.

While the BoJ will be the focal point, investors should monitor Japanese government chatter about the Yen. A stronger USD/JPY increases intervention risks.

US Economic Calendar: Fed Speakers in Focus

Later in the Tuesday session, investors should monitor Fed speakers for clues about the Fed rate path.

FOMC members Thomas Barkin, Michael Barr, Raphael Bostic, Christopher Waller, and John Williams are on the calendar to speak.

On Monday (May 20), FOMC members Michael Barr and Raphael Bostic were among a chorus of Fed speakers wanting more confidence inflation was returning to the target before supporting a rate cut.

The recent speeches influenced investor expectations of a September Fed rate cut. Nevertheless, the markets are still betting on a September rate cut.

According to the CME FedWatch Tool, the chances of the Fed leaving interest rates unchanged in September increased from 35.2% to 40.4% on Monday (May 20).

Views on inflation, the US labor market, and the timing of a Fed interest rate cut need consideration.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on central bank chatter before the prelim Services PMIs (Thurs). Hawkish Fed commentary could further fuel buyer appetite for the USD/JPY. However, weaker US service sector activity may force the Fed into a more dovish interest rate trajectory.

USD/JPY Price Action

Daily Chart

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

A USD/JPY break above the 157 handle would support a move toward the 158 handle. A breakout from 158 could bring the April 29 high of 160.209 into play.

Central bank commentary needs consideration on Tuesday (May 21).

Alternatively, a USD/JPY drop below the 155 handle could give the bears a run at the 50-day EMA. A break below the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 58.30 indicates a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.