USD/JPY Forecast: Impact of Tokyo Inflation and US Fed Rate Cut Prospects

It could be a pivotal day for the global financial markets. The Japanese government could intervene to bolster the Yen, while the US Personal Income and Outlays Report may decide the number of 2024 Fed rate cuts.

Will the Japanese government wait for the US inflation numbers before an intervention decision?

Tokyo Inflation Hits 2%: What is Next?

Tokyo inflation data on Friday impacted USD/JPY demand, with the annual rate rising from 2.2% to 2.3% and core inflation from 1.9% to 2.1%, against forecasts of 2.4% and 2%.

The Tokyo CPI Ex Food and Energy inflation rate increased from 1.2% to 1.4%. Economists expected an inflation rate of 1.9%. The Bank of Japan monitors the ex Food and Energy numbers more closely for monetary policy discussions.

The pickup in inflationary pressures may intensify investor expectations of a July Bank of Japan rate hike. Moreover, in June, the Bank of Japan announced it would reduce its Japanese Government Bond (JGB) purchases, also referred to as quantitative tightening (QT). The quantum of the cut in JGB purchases may have more impact on dollar-yen interest rate differentials.

Later this morning, industrial production and housing market-related figures are also out. However, the numbers could have a limited impact on the USD/JPY pair as investors monitor Japanese government chatter and consider the looming US inflation numbers.

How could the USD/JPY respond to another Japanese government intervention?

The Intervention Zone and USD/JPY Yen Responses

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.”

Asked if the BoJ would risk cutting JGB purchases back more aggressively if US inflation numbers sink expectations of a September Fed rate cut, she replied,

“No choice: yen beyond 160.”

Despite the rising threats of intervention from Japanese government officials, the USD/JPY surpassed the April 29 high of 160.209, reaching a Wednesday high of 160.823. Holding onto the 160 handle, the Japanese government may intervene at any time.

During the last intervention, the USD/JPY slid to a May 3 low of 151.856 before retaking the 160 handle on June 26.

A similar pattern could reemerge if the government intervenes before the US inflation numbers and the US inflation numbers sink expectations of a September Fed rate cut.

How will the US inflation numbers influence the Fed rate path?

US Personal Income and Outlays Report and the Fed in Focus

On Friday, the US Personal Income and Outlays report is crucial for September Fed rate cut prospects. Economists expect the Core PCE Price Index to rise 2.6% year-on-year, down from 2.8% in April.

Lower-than-expected figures could boost confidence in a rate cut, though higher personal income and spending trends could sustain demand-driven inflation, potentially requiring a prolonged high rate trajectory.

Forecasts suggest personal income and spending will climb by 0.4% and 0.3%, respectively. For context, April saw increases of 0.3% in personal income and 0.2% in spending.

With inflation taking center stage, investors should monitor FOMC member statements. Responses to the Personal Income and Outlays Report and perspectives on the timing of a Fed rate cut could sway market sentiment.

FOMC members Thomas Barkin and Michelle Bowman are on the calendar to speak, adding the potential for market-moving commentary.

Short-term Forecast: Bearish

USD/JPY trends hinge on intervention chatter, US inflation data, and Fed speeches. Higher US inflation could prompt a Japanese government intervention, with the BoJ possibly cutting JGB purchases more aggressively in July.

Considering the dynamics, the USD/JPY could face stern resistance to the upside. The USD/JPY could drop to 150 if the Japanese government intervenes and the BoJ signals plans to aggressively cut JGB purchases.

USD/JPY Price Action

Daily Chart

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

A break above the Wednesday, June 26, high of 160.872 could give the bulls a run at the 162 handle.

Interventions, Bank of Japan commentary, and US inflation numbers require investor attention on Friday.

Conversely, a USD/JPY break below the 160 handle could signal a drop to the 50-day EMA. A fall through the 50-day EMA could bring the $151.685 support level into play.

The 14-day RSI at 72.28 shows a USD/JPY in overbought territory. Selling pressure could intensify at the June 26 high of 160.872.