USD/JPY Forecast: Tokyo Inflation, the Yen, and Bank of Japan Rate Hikes

Tokyo Inflation, Retail Sales, and Unemployment

Tokyo inflation figures for May will influence buyer demand for the USD/JPY. Economists forecast the annual inflation rate to increase from 1.8% to 2.0% in May.

Hotter-than-expected numbers may fuel speculation about a 2024 Bank of Japan rate hike. BoJ concerns about the effects of the weaker Yen on consumer prices place greater emphasis on the data. The BoJ recently warned about the willingness to raise interest rates if inflation accelerates because of the Yen.

Beyond inflation, retail sales and unemployment numbers also need consideration.

Economists forecast retail sales to increase by 0.6% in April after sliding 1.2% in March. An upswing in retail sales could support a more hawkish BoJ rate path. Consumer spending fuels demand-driven inflation. Significantly, the April numbers could reflect the effects of the spring wage hikes on consumption.

Additionally, economists forecast the unemployment rate to remain steady at 2.6% in April. Stable labor market conditions could support consumer confidence. Upward trends in consumer confidence may signal a pickup in household spending.

Other stats include industrial production and housing sector-related data. However, these will likely play second fiddle to the inflation, retail sales, and unemployment numbers.

With inflation in the spotlight, investors should monitor Bank of Japan commentary. Reaction to the stats and views on interest rate hikes could move the dial.

US Economic Calendar: US Personal Income and Outlays Report

Later in the Friday session, the all-important US Personal Income and Outlays Report will warrant investor attention.

Economists forecast the Core PCE Price Index to increase 2.8% year-on-year in April after a rise of 2.8% in March. Sticky inflation figures could impact investor expectations of a September Fed rate cut.

However, investors should consider the personal income and spending figures. Upward personal income and spending trends may fuel demand-driven inflation and a more hawkish Fed rate path.

Economists forecast personal income to increase by 0.3% in April after rising by 0.5% in March. Furthermore, economists predict personal spending to increase by 0.3% after advancing by 0.8% in March.

With the Personal Income and Outlays Report in focus, FOMC member chatter also needs consideration. Reactions to the Report and views on the Fed interest rate trajectory could influence buyer appetite for the USD/JPY.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the Tokyo inflation numbers and the US Personal Income and Outlays Report. However, central bank commentary also needs consideration amidst shifting sentiment toward BoJ and Fed policy goals. Hotter-than-expected US inflation numbers may tilt monetary policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

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

A USD/JPY break above the 157.5 handle could support a move toward the 160 handle. Moreover, a return to 160 could give the bulls a run at the April 29 high of 160.209.

Inflation, retail sales, and unemployment numbers from Japan need consideration before the US session.

Conversely, a USD/JPY drop below the 156 handle could give the bears a run at the 50-day EMA. A fall through the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 57.37 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.