USD/JPY Forecast: Middle East Tensions and BoJ Policy Bets to Shape Yen’s Path

Highlights

• The USD/JPY fell by 0.51% on Friday, ending the session at 149.595.
• Hotter-than-expected inflation figures from Japan raised the expectation of a Bank of Japan pivot from ultra-loose policy.
• On Monday, the Middle East conflict and bets on Bank of Japan monetary policy moves will guide the USD/JPY.

Friday Overview of USD/JPY Movements

The USD/JPY fell by 0.51% on Friday. Reversing a 0.11% gain from Thursday, the USD/JPY ended the session at 149.595. The USD/JPY rose to a high of 150.412 before falling to a low of 149.458.

Pre-Bank of Japan Bets and the Middle East in Focus

On Tuesday, the Bank of Japan (BoJ) will deliver the highly anticipated monetary policy decision. The BoJ will also release updated inflation forecasts. Investors expect the BoJ to raise forecasts, pressuring the Board to pivot from an ultra-loose monetary policy stance.

Recent inflation figures for Tokyo align with expectations of an upward revision to inflation forecasts. Speculation before the BoJ interest rate decision and press conference will likely influence the buyer appetite for the Yen.

However, there are no economic indicators from Japan to influence the Yen on Monday. The lack of economic indicators will also leave the USD/JPY in the hands of news updates from the Middle East.

An escalation in the Middle East conflict could fuel the buyer appetite for the safety of the Yen.

Dallas Fed Manufacturing Index and Capitol Hill in Focus

On Monday, the Dallas Fed Manufacturing Index will garner investor interest. The US manufacturing sector contributes less than 30% to the US economy. However, investors could be sensitive to weaker forward-looking sub-components of US economic reports.

Trends in new orders, prices, and employment warrant consideration. Early cracks in the US economy could fuel fear of a US economic recession.

Beyond the economic calendar, news from Capitol Hill on the Middle East conflict will influence market risk sentiment. US involvement in the Middle East raised fears of a regional conflict. Increased US military presence and activity in the Middle East may leave the USD/JPY weaker.

Short-term Forecast

Near-term trends for the USD/JPY hinge on the Bank of Japan and the US Federal Reserve. A Bank of Japan pivot away from ultra-loose could impact the USD/JPY. In contrast, the markets expect the Fed to hit the brakes on interest rate hikes, which could bring sub-148 into play.

USD/JPY Price Action

Daily Chart

The USD/JPY remained above the 50-day and 200-day EMAs, affirming bullish price signals. A USD/JPY break above the 150.201 resistance level would bring the 151.889 resistance level into play.

USD/JPY movement will hinge on market risk appetite and bets on a BoJ pivot from ultra-loose policy.

A drop below 149 would support a move to the 148.405 support level and the 50-day EMA. News updates from the Middle East will influence buyer appetite for the USD/JPY.

The 14-day RSI at 55.59 indicates a USD/JPY break above the 150.201 resistance level before entering overbought territory.

4-Hourly Chart

The USD/JPY sits below the 50-day EMA while remaining above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

A USD/JPY break above the 50-day EMA and 150.201 resistance level would bring 151 into play.

However, a return to sub-149 and a drop below the 200-day EMA would support a move toward the 148.405 support level.

The 14-period 4-hourly RSI at 40.03 indicates a USD/JPY drop below the 149 handle before entering oversold territory.