USD/JPY Forecast: Eyes on Japanese Economic Signals Amid Rate Hike Speculation

The Tertiary Industry Index and the Bank of Japan

On Monday, the Tertiary Industry Index will put the investor focus on the USD/JPY.

Economists forecast the Tertiary Industry Index to increase by 0.1% in March after rising by 1.5% in February.

Weaker-than-expected numbers would paint a gloomier picture of the Japanese economy. The Japanese economy contracted by 0.5% in Q1 2024.

However, the numbers are unlikely to influence the Bank of Japan interest rate trajectory. Household spending, the services sector, and demand-driven inflation are the focal points for the BoJ.

Beyond the numbers, investors should monitor BoJ commentary throughout the session. The effects of a weaker Japanese Yen on import costs, consumer prices, and household purchasing power have fueled speculation about a June interest rate hike. Hawkish chatter supporting a June interest rate hike could increase buyer demand for the Japanese Yen.

US Economic Calendar: Fed Speakers in Focus

Later in the Monday session, FOMC member speakers warrant investor attention.

Tight labor market conditions continue to support wage growth. Higher wages could increase disposable income. Upward trends in disposable income could fuel consumer spending and demand-driven inflation.

FOMC members Philip Jefferson, Christopher Waller, and Raphael Bostic are on the calendar to speak.

Views on inflation, the economic outlook, and the timing for a Fed interest rate cut could move the dial.

In recent speeches, FOMC members Raphael Bostic, Loretta Mester, and Michelle Bowman signaled the need for a higher-for-longer Fed rate path to bring inflation to the 2% target. Moreover, Michelle Bowman warned about an interest rate hike if consumer prices trended higher.

The April US CPI Report and retail sales figures raised investor bets on a September Fed rate cut. However, increasing concerns about the tight US labor market and sticky inflation could impact investor expectations of a September Fed rate cut.

According to the CME FedWatch Tool, the chances of the Fed leaving interest rates unchanged in September declined from 38.8% to 35.2% in the week ending May 17.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on economic data from Japan and central bank commentary. Hawkish FOMC member chatter would drive buyer demand for the US dollar, However, calls for a June BoJ rate hike may impact the USD/JPY more.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to the 156 handle could signal a move to the 158 handle. A break above 158 may give the bulls a run at the April 29 high of 160.209.

On Monday, the Tertiary Industry Index and central bank commentary need consideration.

Alternatively, a USD/JPY fall through the 50-day EMA would bring the 151.685 support level into play.

The 14-day RSI at 55.57 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.