USD/JPY Forecast: Japan’s Core Annual Inflation Rate Falls Short of 3.0%

Highlights

• The USD/JPY ended the Thursday session flat at 149.537.
• Easing bets on a May Fed rate cut countered expectations of a BoJ pivot from negative rates.
• On Friday, inflation numbers from Japan drew investor interest ahead of private sector PMI numbers.

USD/JPY Movements on Thursday

The USD/JPY ended the Thursday session flat at 149.537. The USD/JPY fell to a low of 148.888 before rising to a Thursday high of 149.691. On Wednesday, the USD/JPY gained 0.78%.

Japan Inflation Supports a BoJ Exit from Negative Rates

On Friday, inflation numbers from Japan garnered investor interest. The annual inflation rate accelerated from 3.0% to 3.3% in October, with core inflation up from 2.8% to 2.9%. Economists forecast rates of 3.2% and 3.0%, respectively.

The hotter-than-expected annual inflation rate supports bets on the Bank of Japan (BoJ) exiting negative rates. However, the core inflation figure could give the BoJ some breathing room.

Later this morning, private sector PMI numbers for November also need consideration. A pickup in service sector activity and a less marked contraction across the manufacturing sector would support a BoJ pivot. Economists forecast the Services PMI to rise from 51.6 to 52.3 and the Manufacturing PMI to increase from 48.7 to 48.8.

A larger-than-expected rise in the Services PMI may have more impact. The services sector contributes almost 70% to the Japanese economy. An improving macroeconomic environment would allow the BoJ to exit negative rates to tackle inflation.

US Private Sector in Focus

On Friday, the US private sector will be in the spotlight. Recent labor market figures have eased bets on a May Fed rate cut. Preliminary private sector PMIs for November will influence the Fed interest rate path. The Services PMI will have more impact. US services contribute over 70% to the economy.

However, investors must consider the subcomponents, including prices, new orders, and employment. A pickup in price pressures and rising staff levels could fuel demand-driven inflationary pressures. Rising staff levels and wages (input prices) increase disposable income, fueling consumption and demand-driven inflation.

A more hawkish rate path raises borrowing costs, reducing disposable income and spending. Weaker consumer spending would dampen demand-driven inflationary pressures.

Economists forecast the Manufacturing PMI to decline from 50.0 to 49.8. Significantly, economists expect the US Services PMI to fall from 50.6 to 50.4.

Short-term Forecast

Inflation numbers from Japan could pressure the BoJ to exit negative rates. In contrast, the markets are eyeing an H1 2024 Fed rate cut. Monetary policy divergence remains tilted toward the Yen, suggesting a slow move to 145.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to 150 would support a break above the 150.201 resistance level.

Private sector PMIs and central bank chatter are focal points after the inflation numbers from Japan.

A fall through the 50-day EMA would bring the 148.405 support level into play.

The 14-day RSI at 47.97 suggests a USD/JPY fall to the 148.405 support level before entering oversold territory.

4-Hourly Chart

The USD/JPY hovers below the 50-day and 200-day EMAs, sending bearish near-term price signals.

A USD/JPY break above the EMAs would support a move to the 150.201 resistance level.

However, a drop below the 149 handle would bring the 148.405 support level into play.

The 14-period 4-hour RSI at 54.89 indicates a USD/JPY break above the 150.201 resistance level before entering overbought territory.