USD/JPY Forecast: Can Retail Sales Drive Yen Gains Amidst BoJ Speculation?

As investors brace for Thursday, June 27, all eyes are on Japan’s retail sales figures. The stakes are high: a weak Yen has already begun to impact private consumption and the broader Japanese economy.

Meanwhile, crucial US economic data will further complicate the picture, making this a pivotal moment for global markets. Will the BoJ take decisive action, or will external pressures steer their course?

Retail Sales, the Japanese Economy, and the Japanese Yen

Retail sales figures from Japan will influence investor appetite for the USD/JPY on Thursday, June 27.

Economists forecast retail sales to fall by 0.5% in May after rising by 1.2% in April. Additionally, economists expect retail sales to increase 2.0% year-on-year after rising 2.4% in April.

A larger-than-expected decline in retail sales could reflect the effects of a weaker Yen on private consumption. Import costs increase because of the weaker Yen, affecting consumer prices and household spending.

Private consumption accounted for 53.6% of nominal GDP in March 2024, with a slump in private consumption contributing to the economic contraction in Q1 2024. Private consumption fell by 0.7% in Q1 2024, with the Japanese economy contracting by 0.5% quarter-on-quarter.

Can a Larger-than-Expected Fall in Retail Sales Force a Bank of Japan Policy Move?

BoJ Deputy Governor Ryozo Himino recently warned about the effects of a weaker Yen on the economy, saying,

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices.”

Monetary policy tightening through rate hikes and a sharp cut in JGB purchases could have more lasting success in bolstering the Yen. In April, the Japanese government intervened to strengthen the Yen. The USD/JPY slid below the 152 handle on May 3, only to retake the 160 handle on June 26.

On Wednesday, June 26, Bruegel Senior Fellow Alicia Garcia Herrero shared her views on effective measures to bolster the Yen, saying,

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

The Bank of Japan is banking on a more dovish Fed rate path, the net effect being a narrowing of the interest rate differential in favor of the Japanese Yen. If US economic indicators signal a more hawkish Fed rate path, the BoJ may need to take more aggressive measures to counter US Treasury yield trends.

Can US jobless claims raise expectations of a September Fed rate cut?

US Jobless Claims: A Prelude to the Crucial Friday Data Release

Later in the session on Thursday, US jobless claims, durable goods orders, and finalized Q1 GDP numbers will garner investor attention.

Unless there is a downward revision to Q1 GDP numbers and a slump in durable goods orders, weekly jobless claims could influence the Fed rate path more.

Economists expect initial jobless claims to fall from 238k to 236k in the week ending June 22. A larger-than-expected fall in jobless claims could reduce investor bets on a September Fed rate cut.

Tight labor market conditions support wage growth and consumer confidence. Upward wage trends and consumer confidence could fuel consumer spending and demand-driven inflation. The Fed could leave rates higher for longer to raise borrowing costs, impact hiring trends, and reduce consumer spending.

Labor Market and Consumer Confidence Trends Highlight the Fed Dilemma

Conference Board Chief Economist Dana Peterson commented on the June US consumer confidence survey, attributing the narrow movements in the CB Consumer Confidence Index to a robust US labor market.

Consumer confidence and unemployment trends suggest the Fed may require higher unemployment levels if inflationary pressures persist. The CB Consumer Confidence Index last dropped below 90 in January 2021. The US unemployment rate stood at 6.3% in January 2021 compared with 4.0% in May 2024. However, a sharp rise in unemployment could signal a hard landing and its election year.

Short-term Forecast: Bearish

Near-term trends for USD/JPY will hinge on intervention chatter, Japanese retail sales, and inflation figures. Higher inflation trends and a slump in retail sales could force the BoJ to tighten monetary policy in July. However, hotter-than-expected US inflation figures could counter the effects of BoJ maneuvers on interest rate differentials.

USD/JPY Price Action

Daily Chart

The USD/JPY sat comfortably above the 50-day and 200-day EMAs, confirming the bullish price trends.

A USD/JPY return to the Wednesday, June 26, high of 160.872 could signal a move to the 162 handle.

Interventions, Bank of Japan commentary, and retail sales figures from Japan require investor attention before the US session.

Conversely, a USD/JPY drop below the 160 handle could bring the 50-day EMA into play. A drop below the 50-day EMA could give the bears a run at the $151.685 support level.

The 14-day RSI at 72.51 shows a USD/JPY in overbought territory. Selling pressure could intensify at the Wednesday, June 26, high of 160.872.