USD/JPY Forecast: US Inflation Forecasts and Fed Rate Cut Bets Signal Bearish Trend

Bank of Japan Under the Spotlight

On Wednesday, August 14, the Bank of Japan and the USD/JPY will be in the spotlight.

This week, Japan’s government requested that Bank of Japan Governor Kazuo Ueda attend a special parliamentary session to discuss the July rate hike. The session may draw significant market interest, with the BoJ Governor’s outlook likely to affect USD/JPY price trends.

The request follows remarks from former BoJ Board Member Makoto Sakurai regarding the BoJ rate hike, stating,

“It’s important to bring questions into your own turf so you can make the points you want to make, but Ueda hasn’t controlled the situation well. The BOJ is moving from excessive monetary easing to appropriate monetary easing, and the biggest problem is that Ueda failed to communicate firmly they will maintain easing. That’s always been a condition they’ve kept.”

Notably, Bloomberg reported on the Bank of Japan Governor’s silence before the July 31 policy decision and press conference. The BoJ Governor reportedly set a personal record of over 38 days without discussing monetary policy.

Bank of Japan Signals Caution on Future Rate Hikes

Last week, Bank of Japan Deputy Governor Uchida Shinichi calmed the global markets, saying,

“I believe that the Bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile.”

Former BoJ Board Member Makoto Sakurai also shared his views on the BoJ’s policy outlook, stating,

“They won’t be able to hike again, at least for the rest of the year. It’s a toss-up whether they can do one hike by next March.”

The July Rate Hike and Market Mayhem

On July 31, the Bank of Japan unexpectedly raised interest rates to around 0.25% while announcing the anticipated cut to Japanese Government Bond (JGB) purchases (quantitative tightening). Significantly, the BoJ Governor hinted at further rate hikes and a neutral interest rate of around 1%. The monetary policy decision and forward guidance contributed to the Yen rally and the Nikkei 225’s brief collapse.

Is the Yen Carry Trade Unwind Over?

Economists have warned that the Yen carry trade unwind may not be over, exposing the USD/JPY and the global markets to more volatility.

On August 8, the Kobeissi Letter, an industry-leading commentary on global capital markets, stated that Deutsche Bank put the Yen carry trade at $20 trillion.

With US inflation and labor market data due this week, the data could signal a further narrowing of the interest rate differential between the US and Japan, possibly triggering another Yen carry trade unwind.

Goldman Sachs Private Wealth Management Investment Strategy Managing Director Matheus Dibo commented on market conditions, stating,

“Volatility could remain elevated for quite a while. We have some key data points this week. We were talking about earlier, retail sales CPI, Jackson Hole next week, so a lot of things that could move markets over the next few days.”

Expert Commentary on Interest Rate Differentials

ARK Invest Founder, CEO, and CIO Cathie Wood recently commented on Treasury yields and the Fed Funds Rate, stating,

“The metal-to-gold ratio suggests that the 10-year Treasury bond yield should be around 2% today, not where it is at 3.8% or last October’s 5%. If the 10-year Treasury should yield ~2% today, should the Fed funds rate be closer to 1%?”

The Bank of Japan’s Summary of Opinions revealed an intention to return the policy interest rate to a neutral rate of 1% over time.

If interest rate differentials matter, the outlook is bearish for the USD/JPY, even if the BoJ keeps interest rates on hold.

US Economic Calendar

On Wednesday, August 14, the heavily anticipated US CPI Report will be in focus.

Economists expect the core annual inflation rate to drop from 3.3% year-on-year in June to 3.2% in July.

Softer-than-expected numbers could fuel speculation about a possible 50 basis point September Fed rate cut and multiple 25 basis point cuts in November and December.

A softer CPI Report could allow the Fed to focus on the waning US labor market. Deteriorating labor market conditions could lead to further cuts in Q1 2025.

Expert Commentary

Arch Capital Global Chief Economist Parker Ross commented on the July producer price data from Tuesday, August 13, saying,

“This is certainly the type of inflation report the Fed wants to see and markets agree, with the 10y UST moving down to 3.88% from 3.91 at yesterday’s close. […]. Market odds of a 50bps rate cut in September rose above 60% from ~55% at yesterday’s close.”

Producer prices increased by 0.1% in July, down from a 0.2% rise in June.

Short-term Forecast: Bearish

USD/JPY trends will hinge on the US CPI Report and central bank commentary. Softer US inflation numbers could signal a more dovish Fed path and a further narrowing of the interest rate differential between Japan and the US. Softer-than-expected US inflation numbers could push the USD/JPY below 145 on monetary policy divergence shifts.

Investors should remain alert. Monitor real-time data, central bank insights, 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 and 200-day EMAs, affirming the bearish price signals.

A USD/JPY break above the 148.529 resistance level and the top trend line could give the bulls a run at 150. Furthermore, a return to 150 could signal a move toward the 151.685 resistance level.

The US CPI Report and central bank commentary require consideration on Wednesday.

Conversely, a break below the 145.891 support level could give the bears a run at the 143.495 support level.

The 14-day RSI at 30.52 suggests a USD/JPY drop below 146.500 before entering oversold territory.