USD/JPY Forecast: BoJ’s Zero Rates vs. US Economic Outlook – Which Way for the Yen?

USD/JPY Movement on Thursday

The USD/JPY advanced by 0.23% on Thursday. Following a 0.27% gain on Wednesday, the USD/JPY ended the session at 151.604. The USD/JPY fell to a low of 150.261 before rising to a Thursday session high of 151.753.

Inflation, the Bank of Japan, and Zero Rates

On Friday, inflation numbers from Japan warranted investor interest. Hotter-than-expected inflation figures could adjust the outlook toward the Bank of Japan interest rate trajectory.

The markets expect the BoJ to leave interest rates at zero for the foreseeable future, sending the USD/JPY toward 152. However, a pick-up in inflationary pressures before wage hikes influence private consumption could signal a more hawkish rate path.

The annual inflation rate accelerated from 2.2% to 2.8% in February. Economists forecast an annual inflation rate of 3.0%. Moreover, the core inflation rate rose from 2.0% to 2.8% year-on-year, in line with forecasts.

March wage negotiations yielded the most marked wage hikes in three decades. On Thursday, service sector data from Japan signaled an improving macroeconomic backdrop. Significantly, the BoJ considers the services sector pivotal in building inflationary pressures.

An improving macroeconomic environment, higher wages, and upward trends in household spending suggest the need for more BoJ action. However, the BoJ will be mindful of a stronger Yen and the counter effects on inflation.

US Economic Calendar: Fed Chair Powell and FOMC Member Speeches

On Friday, the US Federal Reserve will be in focus. After the FOMC Economic Projections and press conference, Fed Chair Powell will be under the spotlight.

The Fed Chair will attend a Fed Listens event. Opening remarks warrant investor attention. Nonetheless, Powell will unlikely stray from the FOMC press conference script.

However, attendees and moderators FOMC members Michelle Bowman and Philip Jefferson could provide alternative perspectives.

Views on the current macroeconomic environment and economic outlook need consideration. Investors must also monitor references to inflation and the timeline for a Fed interest rate cut. A deviation from the Fed Chair Powell press conference could move the dial.

While the focus will be on the Fed Listens event, FOMC member Michael Barr is also on the calendar to speak.

Michael Barr, Michelle Bowman, and Philip Jefferson are voting members of the FOMC.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on inflation, consumer spending, and central bank commentary. In Japan, a jump in household spending and a pick up in service sector activity could adjust the BoJ rate path. Nonetheless, interest rate differentials and carry trades favor the US dollar.

USD/JPY Price Action

Daily Chart

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

A USD/JPY breakout from the 151.685 resistance level would give the bulls a run at the 152 handle.

Inflation numbers from Japan and Fed speakers warrant investor attention.

Conversely, a USD/JPY break below the 150 handle would bring the 50-day EMA and the 148.529 support level into play.

The 14-day RSI at 65.95 indicates a USD/JPY advance to the 152 handle before entering overbought territory.