USD/JPY Forecast: Producer Prices and Bets on a Bank of Japan Pivot

Highlights

• The USD/JPY gained 0.55% on Monday, ending the session at 145.676.
• On Tuesday, producer prices from Japan will garner investor interest amidst easing bets on a BoJ pivot from negative rates.
• US manufacturing data and FOMC member commentary also need consideration.  

USD/JPY Movement on Monday

The USD/JPY gained 0.55% on Monday. Partially reversing a 0.27% loss from Friday, the USD/JPY ended the session at 145.676. The USD/JPY fell to a low of 144.839 before rising to a session high of 145.942.

Producer Prices and the Bank of Japan

On Tuesday, producer prices for December warrant investor attention. The Bank of Japan continues to signal the need for wage growth and demand-driven inflation to exit negative rates.

Softer producer prices would point to a weakening demand environment. Producers reduce costs in a more competitive environment. Downward trends in producer prices could ease consumer price inflationary pressures.

Economists forecast producer prices to decline by 0.3% year-over-year in December. In November, producer prices increased by 0.3% year-over-year. Compared with November, economists expect producer prices to remain unchanged. Producer prices increased by 0.2% month-on-month in November.

Beyond the numbers, investors must monitor Bank of Japan commentary. Reaction to the producer prices report and views on the timing of a pivot from negative rates would move the dial.

US Manufacturing and FOMC Member Views

On Tuesday, the US manufacturing sector will be in the spotlight. Economists forecast the NY Empire State Manufacturing Index to rise from -14.5 to -5.0 in January.

The US manufacturing sector accounts for less than 30% of the US economy. However, better-than-expected numbers would support expectations of a soft landing. Barring an unexpected fall in the Index, the report should have a limited impact on the Fed rate path.

Investors must also consider FOMC member speeches after the recent US CPI Report and US producer prices. FOMC member Christopher Waller is on the calendar to speak. Forward guidance on inflation and interest rates warrants investor attention.

Short-term Forecast

Near-term trends for the USD/JPY hinge on inflation numbers from Japan, US retail sales, and central bank forward guidance. Softer inflation numbers from Japan and a weakening demand environment could allow the BoJ to keep rates in negative territory. Easing bets on a BoJ pivot and an upward trend in US retail sales could tilt policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to the 146 handle would support a move to the 146.649 resistance level. A break above the 146.649 resistance level would bring the 147 handle into play.

On Tuesday, investors will focus on producer prices from Japan, US manufacturing data, and central bank chatter.

However, a fall through the 50-day EMA would give the bears a run at the 144.713 support level. A break below the 144.713 support level would bring the 200-day EMA into view.

The 14-day RSI at 56.71 suggests a USD/JPY break above the 146.649 resistance level before entering overbought territory.

4-Hourly Chart

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

A USD/JPY return to the 146 handle would bring the 146.649 resistance level and 147 handle into play.

However, a fall through the 200-day EMA would give the bears a run at the 144.713 support level and the 50-day EMA. Significantly, buying pressure could intensify at 144.713. The 50-day EMA is confluent with the 144.713 resistance level.

The 14-period 4-hour RSI at 60.02 suggests a USD/JPY return to the 146.649 resistance level before entering overbought territory.