USD/JPY Forecast: Hawkish Fed vs. Japan’s Economic Dips—How Prices Might Tilt

Highlights

• USD/JPY experienced a 0.25% dip, ending Thursday at a notable 147.286 after an initial rise.
• Japanese Q2 GDP shows growth at 1.2%, down from a preliminary 1.5%, sparking significant attention.
• US economic indicators lean hawkish, with final Fed rate hike bets rising amid service sector insights.

Thursday Overview

On Thursday, the USD/JPY fell by 0.25%. Following a 0.05% loss on Wednesday, the USD/JPY ended the day at 147.286. The USD/JPY rose to a high of 147.872 before falling to a low of 147.042.

Japanese Economy Fuels BoJ Ultra-Loose Monetary Policy Stance

GDP numbers for the second quarter drew interest. In the second quarter, the Japanese economy expanded by 1.2%, according to finalized numbers, down from a preliminary 1.5%. The economy grew by 0.7% in the first quarter.

Significantly, private consumption declined by 0.6% versus a 0.5% increase in the previous quarter. Ahead of the GDP figures, wage growth numbers for July also drew interest. Overall wage income for all employees rose by 1.3% in July versus 2.3% in June.

Slower wage growth and a fall in private consumption will draw the interest of BoJ board members.

BoJ Governor Ueda recently discussed the need for wage growth and consumer demand to fuel demand-driven inflation. Household spending figures for July and today’s reports support the status quo. Household spending slid by 2.7% in July.

Fed Speakers and Monetary Policy Divergence

Bets on a final Fed rate hike are on the rise. Service sector PMI and labor market stats support one more push before hitting the brakes.

The US services sector comprises over 70% of the economy. Tighter labor markets boost wages and consumption. Increased consumer spending can lead to demand-driven inflation. Wage growth offsets interest rate hikes.

The latest twist in the Fed monetary policy cycle leaves divergence firmly in favor of the US dollar. However, investors must monitor FOMC member speeches for affirmation of a shift in the interest rate trajectory. FOMC member Michael Barr is on the calendar to speak today.

Short-term Forecast

Weaker wage growth and household spending leave the US dollar in the driving seat. Rising bets on a final Fed rate hike put 148 in play. However, Japanese government threats of an intervention to bolster the Yen remain a hurdle for the USD/JPY bulls.

USD/JPY Price Action

Daily Chart

The USD/JPY remained wedged between support and resistance levels. Wage growth and private consumption figures leave the BoJ in ultra-loose mode. Hawkish Fed chatter would support a run at 148 and the 148.405 resistance level.

However, Japanese government warnings of intervention to support the Yen and dovish Fed comments would give the bears a look at sub-147.

The 62.94 14-Daily RSI signals more upside for the USD/JPY before entering overbought territory.

4-Hourly Chart

The USD/JPY stays above the 50-day and 200-day EMAs and the 146.649 support level. Avoiding the 50-day EMA would give the bulls a run at the 148.405 resistance level. However, Fed speakers must deliver hawkish comments on interest rates to support a run at 148.

Dovish Fed commentary and Japanese government warnings of intervention would bring the 50-day EMA and the 146.649 support level into play. However, the 50-day EMA is confluent with the support level, suggesting buyer demand at 146.70.

The 56.30 14-4H RSI reading indicates more upside for the USD/JPY, with 148 in play before entering overbought territory.