USD/JPY Forecast: Japan Inflation Rate Jumps to 2.8% in May

Inflation Data Influences USD/JPY Trading

On Friday, June 21, inflation numbers from Japan influenced buyer demand for the USD/JPY.

The annual inflation rate rose from 2.5% to 2.8% in May. Economists forecast an inflation rate of 2.5%.

Furthermore, the core inflation rate accelerated from 2.2% to 2.5% in May. Economists expected core inflation to increase to 2.6%.

The upswing in inflation could fuel speculation about a July Bank of Japan interest rate hike.

This week, Bank of Japan Governor Kazuo Ueda warned that the BoJ was data dependent vis-à-vis hiking interest rates in July.

Although the inflation numbers are influential, prelim private sector PMIs will also need consideration.

Could the Services PMI Signal a BoJ Rate Hike?

Economists forecast the Jibun Bank Services PMI to fall from 53.8 to 53.7 in June.

A pickup in service sector activity across Japan could raise investor bets on a July Bank of Japan rate hike. In addition to the headline number, factors such as job creation and prices also need consideration.

Upward trends in input and output prices and higher employment rates could incentivize the Bank of Japan to discuss a rate hike in July.

US Economic Calendar: Will the US Services PMI Raise Rate Hike Bets

Later in the session on Friday, US private-sector PMIs will attract investor interest. The S&P Global Services PMI will influence buyer appetite for the US dollar more, contributing over 70% to the US economy. Furthermore, the services sector fuels inflationary pressures.

Economists forecast the S&P Global Services PMI to fall from 54.8 to 53.7 in June. Weaker service sector activity could raise investor bets on a September Fed rate cut. However, investors should consider the sub-components, including job creation, prices, and new orders. A weaker demand environment and downward trends in new orders and prices could dampen demand-driven inflation.

Services inflation remains a focal point for the Fed.

Head of Macroeconomic Research, Pictet Wealth Management Frederik Ducrozet recently discussed services CPI trends, saying,

“No doubt that the last few services CPI prints have been more sticky than expected. The bumps have been driven by different factors across countries, but in all cases the noise should fade and the momentum should ease again after summer.”

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the Services PMIs from Japan and the US and central bank commentary. Better-than-expected service sector data from Japan signal a July Bank of Japan rate hike and a USD/JPY drop toward 150.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to the 159 handle could indicate a move towards 160 and potentially to the April 29 high of 160.209.

Service sector PMIs and central bank chatter require investor attention.

Conversely, a USD/JPY drop below the 157.5 handle could bring the 50-day EMA into play. A fall through the 50-day EMA would support a fall toward the $151.685 support level.

The 14-day RSI at 65.95 suggests a USD/JPY climb to the April 29 high of 160.209 before entering overbought territory.