USD/JPY Forecast: Fed and BoJ Decisions to Impact Yen Price Action

Japan’s Economic Indicators: Retail Sales

On Wednesday, July 31, Japan’s retail sales figures influenced USD/JPY demand.

Retail sales increased 3.7% year-on-year in June, following a rise of 3.0% year-on-year in May.

Higher retail sales could fuel demand-driven inflation, supporting a more hawkish Bank of Japan rate path. Significantly, these numbers preceded the highly anticipated BoJ monetary policy decision.

The Bank of Japan and the USD/JPY in the Spotlight

Later in the morning session, the Bank of Japan’s monetary policy decision will impact Yen demand.

Economists expect the BoJ to hold interest rates unchanged and announce cuts to Japanese Government Bond (JGB) purchases.

Uncertainty about the size of these cuts and the BoJ’s interest rate trajectory exposes the USD/JPY to increased volatility. A surprise BoJ rate hike and aggressive cuts to JGB purchases could narrow interest rate differentials significantly, leading to a possible USD/JPY fall toward 145.

Conversely, a modest reduction in JGB purchases and a hold on interest rates could push the USD/JPY toward 160.

Yen Weakness, the Japanese Economy, and the BoJ

Considerations for Bank of Japan board members may also include the effects of a weak Yen on the Japanese economy.

In July, the Japanese government revised its growth forecasts for the fiscal year ending March 2025 from 1.3% to 0.9%. The government also reiterated concerns about the weak Yen, reportedly stating,

“We can’t overlook the impact a weak yen and rising prices are having on households’ purchasing power,” the private-sector members of the council told Friday’s meeting that discussed the new growth forecasts.”

Previously, Bank of Japan Deputy Governor Ryozo Himino highlighted the weak Yen’s impact on the economy, stating,

“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.”

In Q1 2024, private consumption fell by 0.7%, contributing to a 0.5% contraction in the Japanese economy.

The FOMC Interest Rate Decision and Press Conference

It is a crucial day for the US dollar, with the FOMC interest rate decision and press conference in focus.

Economists predict the Fed will leave interest rates unchanged, putting the FOMC press conference under the spotlight.

Fed Chair Powell’s stance on inflation, the labor market, and the timing of Fed rate cuts will be critical. Concerns about the labor market and a declaration of victory in the inflation battle could signal September and December rate cuts.

A more dovish Fed rate path would support a USD/JPY drop below 150, while concerns about inflation could push the USD/JPY above 155.

In July, Fed Chair Powell said Q2 inflation numbers raised confidence that inflation was returning to the 2% target.

Expert Views on the FOMC Press Conference

Wall Street Journal Chief Economics Correspondent Nick Timiraos commented on the looming Fed interest rate decision,

“ The big question is where the committee and chair sets the bar for a September cut. The cleanest signal probably comes from Powell’s press conference because it’s much easier to convey nuance there, but…”

Short-term Forecast: Bearish

USD/JPY trends will hinge on the Bank of Japan and the Fed’s monetary policy decisions and forward guidance. Aggressive BoJ cuts to JGB purchases and support for multiple rate hikes would bring sub-150 into play. Furthermore, the USD/JPY could drop toward 145 if the Fed signals September and December rate cuts.

Investors should remain vigilant. Monitor real-time data, central bank monetary policy decisions, 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 remained below the 50-day EMA while holding above the 200-day EMA. The EMAs affirmed the bearish near-term but bullish longer-term price signals.

A USD/JPY return to the 155 handle could support a move toward the 50-day EMA. A break above the 50-day EMA could bring 160 into view.

The Bank of Japan and the Fed’s monetary policy decisions require consideration.

Conversely, a drop below the 200-day EMA and the 151.685 support level could signal a fall through the 150 level.

The 14-day RSI at 27.20 shows the USD/JPY in oversold territory. Buying pressure could intensify at the 50-day EMA.