USD/JPY Forecast: Strong Tankan Index and US Housing Data to Influence Yen

Economic Indicators: Reuters Tankan Index

On Wednesday, July 17, the Reuters Tankan Index influenced buyer demand for the USD/JPY.

The Reuters Tankan Index to increase from 6 in June to 11 in July, signaling a pickup in economic activity. The Index considers views from Japan’s leading services and manufacturing firms.

Improving sentiment across the private sector may support job creation and consumer confidence. Higher wages and consumer confidence may fuel household spending and demand-driven inflation.

Household Spending and the Bank of Japan

The Bank of Japan focuses on household spending, which has been weak despite higher wages. Upward trends in wages must translate into private consumption to fuel demand-driven inflation.

Household spending continued to fall in Q2 2024, impacting Japan’s economy after a third quarterly contraction in Q1 2024. An improving macroeconomic environment may allow the BoJ to cut Japanese Government Bond (JGB) purchases more aggressively and raise interest rates. A narrowing of interest rate differentials between the Yen and the dollar could signal a USD/JPY drop to 150.

Meanwhile, US housing sector data may influence near-term USD/JPY trends.

US Housing Data: Permits and Starts

Economists expect housing starts to increase by 3.1% in June (May: -5.5%). Furthermore, economists predict building permits to rise by 0.5% (May: -2.8%).

Upbeat figures could drive buyer demand for the US dollar.

Economists view the housing sector as a litmus test of the US economy. Higher demand may signal positive momentum.

Nevertheless, housing supply trends may influence the Fed rate path. Tight inventories have pushed house prices higher. Affordability issues have driven demand for rentals. Higher rents contribute to housing services and headline inflation.

A pullback in rents through increased housing supply may ease housing services inflation and support multiple 2024 Fed rate cuts. A more dovish Fed could impact buyer demand for the USD/JPY.

Interest Rates and Housing Starts

Peachtree Creek Investments founder Conor Sen recently commented on Q2 housing start numbers, stating,

“In Q2, multi-family housing starts were at their lowest level since Q1 2011, and a dozen of the US’s 50 largest metros saw zero new multi-family starts.”

He also affirmed that the interest rate environment impacted housing starts.

While housing sector data needs consideration, investors should track FOMC Member speeches.

FOMC Member Speakers

FOMC voting Members Thomas Barkin and Christopher Waller are on the calendar to deliver speeches. Their reactions to recent inflation numbers, retail sales figures, and views on the timing of a Fed rate cut could move the dial.

Short-term Forecast: Bearish

USD/JPY trends depend on US labor market data (Thurs) and inflation numbers from Japan (Fri). Weaker US labor market conditions could raise expectations of multiple 2024 Fed rate cuts. Conversely, higher inflation figures from Japan could greenlight a July BoJ rate hike. The BoJ could also cut JGB purchases more aggressively.

Narrower interest rate differentials could support a USD/JPY drop toward 150.

Investors should remain alert as crucial economic indicators loom. 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 hovered above the 50-day and 200-day EMAs, sending bullish price signals.

A USD/JPY return to 160 would support a move to the July 3 high of 161.951.

Intervention warnings, economic data, and central bank commentary require consideration.

Conversely, a drop below the 50-day EMA could give the bears a run at the 155 handle.

The 14-day RSI at 44.55 suggests a USD/JPY drop to 155 before entering oversold territory.