USD/JPY Forecast: Market Eyes Services PMI for Clues on Yen and BoJ Policy

Crucial Services PMI to Dictate USD/JPY Trends

On Wednesday, July 24, Services PMI numbers from Japan will influence the USD/JPY and the Bank of Japan rate path.

Economists forecast the Jibun Bank Services PMI to increase from 49.4 in June to 49.9 in July.

A higher Services PMI may raise investor expectations of a July Bank of Japan rate hike. The services sector contributes about 70% to the Japanese economy.

Additionally, investors should consider the sub-components, including employment and prices. Rising job creation and input/output prices could further increase expectations of a July BoJ rate hike.

The Bank of Japan needs the services sector to fuel headline inflation. The services sector accounts for over 70% of Japan’s workforce. Improving service sector activity could increase jobs, supporting wage growth and disposable income. Rising disposable income may fuel consumer spending and demand-driven inflation.

Another consideration for the Bank of Japan is the effects of the weak Yen on the economy.

Japanese Government and the Weak Yen

The Japanese government reiterated concerns about the weak Yen, reportedly stating,

“We can’t overlook the impact a weak yen and rising prices are having on households’ purchasing power,” the private-sector members of the council told Friday’s meeting that discussed the new growth forecasts.”

Previously, Bank of Japan Deputy Governor Ryozo Himino highlighted the weak Yen’s impact on the economy, stating,

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices.”

Expert Views

Economists also highlighted the effects of the weak Yen. S&P Global Market Intelligence Associate Director Jinyi Pan recently observed the impact of the weak Yen on the private sector, saying,

“More concerning, however, is the pressure on margins for Japanese firms. Average input costs rose at the fastest pace in over a year while output price inflation softened in June, particularly in the service sector. Anecdotal evidence suggested that the effects of a weak Yen and rising labor costs brought up cost inflation.”

Some economists believe reducing JGB purchases would address the Yen’s weakness more sustainably.

Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero recently commented on JGB purchases, stating,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

Speculation about a July BoJ rate hike and JGB purchases cut could signal a USD/JPY drop toward 150.

US Economic Indicators: Services PMI

On Wednesday, the US Services PMI will also draw investor interest.

Economists forecast the S&P Global Services PMI to fall from 55.3 in June to 54.4 in July.

A lower-than-expected services PMI could raise expectations of multiple 2024 Fed rate cuts. The services sector contributes over 70% to the US economy and is the main source of inflation.

Slower service sector activity may impact employment trends and wage growth. Lower wages could reduce disposable income and consumer spending. A pullback in consumer spending may dampen demand-driven inflation.

Investors should consider the sub-components, including input prices and employment. Input prices reflect the effects of wage growth on inflation.

Rising bets on multiple 2024 Fed rate cuts could signal a USD/JPY move toward 150.

Short-term Forecast: Bearish

USD/JPY trends hinge on the July services PMIs, Tokyo inflation (Fri), and the US Personal Income and Outlays Report (Fri). Higher-than-expected Services PMI and inflation numbers from Japan could drive bets on a July BoJ rate hike and a cut to JGB purchases.

Conversely, weaker US Services PMI and inflation numbers could raise expectations of September and December Fed rate cuts.

Narrower interest rate differentials, stemming from monetary policy divergence, could support a USD/JPY drop below 150.

Investors should remain alert. Monitor real-time data, central bank commentary, 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 below the 50-day EMA while holding comfortably above the 200-day EMA. The EMAs affirmed the bearish near-term but bullish longer-term price signals.

A USD/JPY return to 156 could support a move toward the 50-day EMA. A breakout from the 50-day EMA could give the bulls a run at 160.

Services PMIs and Bank of Japan commentary require consideration on Wednesday.

Conversely, a drop below the 155 handle could bring the 200-day EMA and the 151.685 support level into play.

The 14-day RSI at 34.91 suggests a USD/JPY break below 155 before entering oversold territory.