USD/JPY Forecast: Investor Focus on Japanese Economic Indicators and Yen Trends

Japan’s Economic Calendar

On Wednesday, August 7, Japan’s Leading Economic Index may influence demand for the USD/JPY.

Economists expect the Leading Economic Index to drop from 111.2 in May to 109.3 in June.

The Index considers a range of economic indicators, including consumer sentiment and business surveys, helping traders assess the Japanese economy. An unexpected increase could signal an improving macroeconomic environment and a more hawkish Bank of Japan policy stance. Investor bets on Q4 2024 BoJ rate hikes could boost Yen demand, leading to a USD/JPY drop toward 140.

Market sensitivity to Bank of Japan commentary and USD/JPY price movements will intensify following the recent Yen carry trade unwind.

Interest Rate Differentials and Carry Trades

On July 31, the Bank of Japan reduced its Japanese Government Bond (JGB) purchases and unexpectedly raised interest rates. The move coincided with rising bets on multiple 2024 Fed rate cuts, narrowing USD/JPY interest rate differentials in favor of the Yen.

Sharp FX market movements likely resulted in margin calls, forcing investors to unwind Yen carry trades, which impacted global equity markets and fueled a Yen rally.

Expectations of a more hawkish BoJ rate path could further affect Yen carry trades and the global financial markets.

Expert Commentary

Bloomberg TV Asia Pacific Chief Markets Editor David Ingles commented on Tuesday’s market conditions, stating,

“Yes markets are calmer today but fact that VIX futures are still 25+ signals this flush and cleansing process in markets isn’t over.”

Natixis Asia Pacific Chief Economist Alicia Garcia also commented on market conditions, saying,

“The reality is that, beyond the risk of a US recession, there is also a problem in Japan, namely how to exit an ultra-lax monetary policy after so long. Still, a huge amount of short positions in Yen will be unwinding putting appreciation on the Yen, adding to the volatility. Fasten your seatbelts!”

US Economic Calendar

Later in the session on Wednesday, investors should monitor FOMC Member commentary.

Views on inflation, the labor market, the economic outlook, and the Fed rate path are crucial. Hints of a hard landing and calls for multiple rate cuts to bolster the US economy could spook investors.

According to the CME FedWatch Tool, the probability of a 50 basis point September Fed rate cut to the 475-500 target range surged from 13.2% on July 30 to 85.05% on August 5.

Investors also raised bets on a November Fed rate cut. The chances of a November Fed rate cut to the 450-475 target range jumped from 8.2% on July 30 to 45.0% on August 5.

Expert Views

Fidelity Director of Global Macro Jurrien Timmer commented on the US economy, stating,

“Is this the end of the bull market, and is that long-feared recession finally imminent now that the jobless rate is up to 4.3%? I don’t think so, but clearly the jobs market is slowing, as evidenced by both the JOLTS report and Friday’s jobs data. But I think of this more as an unwinding of COVID-era excesses rather than the start of a new downturn.”

On the Fed rate path, Timmer added,

“The forward curve has gone from 3.5% (7 rate cuts) to 3.0% (9 rate cuts). The market is now pricing in three rate cuts this year.”

Short-term Forecast: Bearish

USD/JPY trends will hinge on central bank chatter, US jobless claims, and the BoJ’s Summary of Opinions on Thursday. Rising fears of a US recession and hawkish BoJ commentary could signal a USD/JPY drop below 140.

Investors should remain alert. 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 well below the 50-day and 200-day EMAs, affirming the bearish price signals.

A USD/JPY break above the 145.891 resistance level would support a move toward the 148.529 resistance level and trend line. A breakout from the trend line would bring 150 into view.

Central bank commentary and economic indicators from Japan need consideration on Wednesday.

Conversely, a break below the 143.495 support level could give the bears a run at the 141.032 support level. A drop below the 141.032 support would bring sub-140 into play.

The 14-day RSI at 15.35 shows the USD/JPY in oversold territory. Buying pressure could intensify at the 143.495 support level.