USD/JPY Forecast: Fed Speeches, US Consumer Inflation Numbers in Focus

Intervention Risks Remain as Data from Japan Leaves the Yen on the Back Foot

On Monday (May 13), the USD/JPY will likely respond further to US inflation expectation numbers and Fed chatter from Friday.

Although Japan reported better-than-expected household spending numbers, spending declined by 1.2% year-on-year in March, compared to a 0.5% fall in February. Weaker household spending may dampen demand-driven inflationary pressures and leave the Bank of Japan in a holding pattern.

The inflationary environment in Japan contrasts with sticky inflation in the US, driving buyer demand for the USD/JPY. Furthermore, a weaker Yen may impact future household spending trends. Import costs increase because of a weaker Yen, which could force consumers to curb spending and affect the Japanese economy. Private consumption contributes over 50% to the Japanese economy.

The effects of a weaker Yen on consumption led to the Bank of Japan warning about possible monetary policy adjustments. However, former BoJ Board member Tsutomu Watanabe spoke on Friday, saying the BoJ should not raise interest rates to bolster the Yen. Watanabe warned higher borrowing costs could impact consumption and services inflation.

Inaction from the BoJ would leave the Japanese government in the driving seat to limit the extent of Yen’s weakness.

US Economic Calendar: Consumer Inflation Expectations and the Fed

Later in the Monday session, US consumer inflation expectations will warrant investor interest.

Economists forecast consumer inflation expectations to increase from 3.0% to 3.1% in April. Hotter-than-expected numbers could impact investor bets on a September Fed rate cut. The Fed could respond to sticky inflation with a higher-for-longer rate path.

A higher-for-longer rate path could raise borrowing costs and reduce disposable income. Downward trends in disposable income could affect consumer spending and dampen demand-driven inflation.

Sensitivity to the numbers could intensify following the market reaction to the Michigan Inflation Expectation numbers from Friday. An unexpected increase in the Michigan Inflation Expectations Index contributed to the USD/JPY gains from Friday.

Investors should also consider FOMC member speeches. FOMC members Loretta Mester and Philip Jefferson are on the calendar to speak. Comments on inflation and monetary policy could move the dial.

Short-term Forecast

Near-term trends for the USD/JPY will likely hinge on the US inflation numbers on Tuesday and Wednesday. Hotter-than-expected numbers could fuel speculation about a Fed rate hike and tilt monetary policy divergence toward the US dollar. However, intervention threats could cap the upside for the USD/JPY.

USD/JPY Price Action

Daily Chart

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

A USD/JPY breakout from the 156 handle could support a move to the 158 level. A break above 158 would give the bulls a run at the April 29 high of 160.209.

Bank of Japan commentary, US consumer inflation expectations, and Fed speakers need consideration.

Alternatively, a USD/JPY drop below 155 could bring the 50-day EMA into play. A break below the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 57.90 indicates a USD/JPY move to the 160 handle before entering overbought territory.