USD/JPY Forecast: Manufacturing PMIs and the US Labor Market in Focus

Highlights

• The USD/JPY declined by 0.50% on Wednesday, ending the session at 146.864.
• Weaker-than-expected US labor market data offset a more hawkish-than-expected Fed, leaving the USD/JPY in negative territory.
• On Thursday, manufacturing PMIs and US labor market data warrant investor attention.

USD/JPY Movement on Wednesday

The USD/JPY declined by 0.50% on Wednesday. Reversing a 0.07% gain from Tuesday, the USD/JPY ended the day at 146.864. The USD/JPY rose to a session high of 147.897 before falling to a Wednesday low of 146.005.

Japan Manufacturing in Focus

On Thursday, finalized manufacturing sector PMI numbers from Japan will draw investor interest. According to the preliminary survey, the Jibun Manufacturing PMI increased from 47.9 to 48.0 in January. Sub-components, including input prices and employment, also need consideration.

However, the report should have a limited impact on Bank of Japan plans to exit negative rates. The manufacturing sector contributes less than 30% to the Japanese economy.

Last week, Bank of Japan Governor Kazuo Ueda highlighted wage growth and the services sector as the focal points for the BoJ. The services sector contributes over 60% to the Japanese economy.

US Economic Calendar: Labor Market Stats and the Manufacturing Sector

Later in the session, the US manufacturing sector and labor market will be in focus. Weaker-than-expected labor market data could question expectations of a soft landing.

Economists forecast unit labor costs to increase 1.6% quarter-on-quarter in Q4 after falling by 1.2% in Q3. Moreover, economists forecast nonfarm productivity to rise by 2.5% in Q4 after increasing by 5.2% in Q3. Significantly, economists predict initial jobless claims to fall from 214k to 212k in the week ending January 27.

Weaker labor market conditions could impact wage growth and reduce disposable income. Downward trends in disposable income could curb consumer spending and dampen demand-driven inflation. Weaker labor market conditions could also impact consumer confidence and spending plans.

Investors may also react to manufacturing PMI numbers. Economists forecast the ISM Manufacturing PMI to fall from 47.4 to 47.0 in January. However, the manufacturing sector contributes less than 30% to the US economy, limiting the influence on the Fed rate path.

Short-term Forecast

Near-term trends for the USD/JPY hinge on US labor market data and BoJ chatter. Tighter US labor market conditions could impact bets on a Fed rate cut. Wage growth trends need consideration. The Fed needs confidence inflation is sustainably moving toward 2% before cutting rates. However, Bank of Japan commentary could affect USD/JPY price trends.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to the 147 handle would give the bulls a run at the 148.405 resistance level.

On Thursday, Bank of Japan commentary, manufacturing PMIs, and US labor market data need consideration.

However, a fall through the 146.649 support level would bring the 50-day EMA into play.

The 14-day RSI at 52.80 suggests a USD/JPY return to the 149 handle before entering overbought territory.

4-Hourly Chart

The USD/JPY remained below the 50-day EMA while holding above the 200-day EMA, affirming bearish near-term but bullish longer-term price signals.

A USD/JPY break above the 50-day EMA would support a move toward the 148.405 resistance level.

However, a fall through the 146.649 support level would give the bears a run at the 200-day EMA.

The 14-period 4-hour RSI at 39.83 suggests a USD/JPY fall to the 200-day EMA before entering oversold territory.