USD/JPY Forecast: Japan Retail Sales Unexpectedly Slide in December

Highlights

• The USD/JPY gained 0.07% on Tuesday, ending the session at 147.597.
• The US CB Consumer Confidence Index and JOLTs Job Openings delivered gains for the session.
• On Wednesday, retail sales from Japan drew interest before the US session and the Fed interest rate decision.

USD/JPY Movement on Tuesday

The USD/JPY gained 0.07% on Tuesday. Partially reversing a 0.44% loss from Monday, the USD/JPY ended the day at 147.597. The USD/JPY fell to a low of 147.097 before rising to a Tuesday session high of 147.926.

Japan Retail Sales Test Bets on a Bank of Japan Pivot

On Wednesday, retail sales figures from Japan drew investor interest. Retail sales increased 2.1% year-over-year in December versus 5.4% in November. Economists expected retail sales to rise by 4.7%. Month-on-month, retail sales slid by 2.9% (Nov: +1.0%). Economists forecast retail sales to increase by 0.5% month-on-month.

The unexpected fall in retail sales could give the Bank of Japan more reason to delay discussions about exiting negative rates.

Downward trends in consumer spending ease demand-driven inflationary pressures. The Bank of Japan needs wage growth to fuel consumer spending and demand-driven inflation to pivot from negative rates.

Industrial production figures also fell short of expectations. Industrial production increased by 1.8% in December, reversing a 0.9% decline from November. Economists forecast a 2.4% increase.

Beyond the numbers, investors must monitor Bank of Japan commentary. References to wages, inflation, and monetary policy would move the dial.

US Economic Calendar: ADP Employment and the US Federal Reserve

Later in the session, US labor market data and the Fed warrant investor attention. Economists forecast the ADP to report a 145k increase in January. The ADP reported a 164k increase in employment in December. A larger-than-expected increase could reduce bets on a March Fed rate cut.

Tighter labor market conditions could support wage growth and increase disposable income. An upward trend in disposable income may fuel consumer spending and demand-driven inflation. A higher-for-longer Fed rate path could impact borrowing costs and disposable income. Downward trends in disposable income would curb consumer spending and dampen demand-driven inflation.

However, investors must also consider employment costs for Q4. With wage growth the focal point, the employment cost – wages figures could have more impact. Economists forecast wages to increase by 1.1% quarter-on-quarter in Q4 versus 1.2% in Q1.

While the numbers need consideration, the Fed interest rate decision is the main event. Economists expect the Fed to leave interest rates at 5.50%. However, uncertainty remains about the timing of an interest rate cut. Forward guidance on the economy, inflation, and interest rates will impact the USD/JPY.

Short-term Forecast

Near-term trends for the USD/JPY remain hinged on the Fed interest rate decision, forward guidance, and BoJ chatter. A more hawkish-than-expected Fed outlook on interest rates could drive buyer demand for the US dollar.

USD/JPY Price Action

Daily Chart

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

A USD/JPY move above the 148.405 resistance level would bring the 150.201 resistance level into play.

On Wednesday, Bank of Japan commentary and the Fed warrant investor attention.

However, a break below the 147 handle would support a fall to the 146.649 support level. A fall through the 146.649 support level would bring the 50-day EMA into play.

The 14-day RSI at 56.96 indicates a USD/JPY move to the 149 handle before entering overbought territory.

4-Hourly Chart

The USD/JPY sat below the 50-day EMA while remaining above the 200-day EMA, confirming bearish near-term but bullish longer-term price trends.

A USD/JPY breakout from the 50-day EMA would give the bulls a run at the 148.405 resistance level.

However, a break below the 147 handle would support a fall to the 146.649 support level.

The 14-period 4-hour RSI at 44.37 indicates a USD/JPY drop to the 146.649 support level before entering oversold territory.