USD/JPY Forecast: Yen Surges on BoJ Monetary Policy Speculations

Japan’s Services PMI Surge Fuels Rate Hike Speculations

On Wednesday, July 24, the Jibun Bank Services PMI increased from 49.4 to 53.9, boosting demand for the USD/JPY.

The higher-than-expected services PMI likely fueled investor bets on a July Bank of Japan rate hike. The sub-components showed output price inflation accelerated in July, with employment rising more quickly.

The July PMI was crucial as investors considered the looming Bank of Japan monetary policy decision.

Bank of Japan Policy Decision Looms

The Bank of Japan recently stated the need for the services sector to drive inflation. A pickup in service sector activity, higher employment, and output price trends signal rising demand-driven inflation.

However, uncertainty remains on whether the BoJ will hike interest rates and cut Japanese Government Bond (JGB) purchases in the same meeting.

A recent Reuters Poll showed that 76% of economists expect the BoJ to hold interest rates steady in July. However, there are reports of the interest rate decision being a closer call.

The Bank of Japan needs to consider the effects of the weak Yen on import prices and household spending. Higher interest rates could counter wage growth and impact private consumption.

Household Spending: The BoJ Bugbear

Private consumption, contributing over 50% to the Japanese economy, fell by 0.7% in Q1 2024, resulting in a 0.5% economic contraction.

Household spending trends continued into Q2 2024, falling by 1.2% in April and 0.3% in May.

Weak consumer spending could signal damper demand-driven inflationary pressures. Moreover, weaker spending may contribute to another quarterly contraction, setting a challenging macroeconomic environment to hike rates.

Japanese Government Bond Purchases and Interest Rate Differentials

The Bank of Japan will announce its plans to cut JGB purchases on July 31. Some economists believe cutting JGB purchases could significantly narrow interest rate differentials between the US dollar and the Yen. Narrower interest rate differentials would boost Yen demand.

Nataxis Asia Pacific Chief Economist Alicia Garcia Herrero commented on JGB purchases, stating,

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

Cutting JGB purchases more aggressively may also give the BoJ more data points to assess consumption and inflation trends before raising interest rates.

The Japanese Economy and the Yen

A stronger Yen would address concerns about the effects of a weak Yen on the Japanese economy.

The Japanese government recently restated its concerns about the weak Yen, reportedly stating,

“We can’t overlook the impact a weak yen and rising prices are having on households’ purchasing power,” the private-sector members of the council told Friday’s meeting that discussed the new growth forecasts.”

Previously, Bank of Japan Deputy Governor Ryozo Himino highlighted the weak Yen’s impact on the economy, stating,

“Exchange-rate fluctuations affect economic activity in various ways. It also affects inflation in a broad-based and sustained way, beyond the direct impact on import prices.”

Aggressive cuts to JGB purchases and an interest rate hike could support a USD/JPY fall below 150. The USD/JPY last sat below 150 in March.

US Economic Indicators: US GDP Numbers in Focus

On Thursday, July 25, US GDP figures will draw investor attention.

Economists predict the US economy will grow by 1.9% in Q2 2024 after expanding by 1.4% in Q1 2024.

A pickup in economic activity would ease immediate fears of a hard US landing. However, upbeat numbers may not shift sentiment toward the Fed rate path.

Softer labor market conditions and easing inflationary pressures remain driving forces behind Fed rate cut bets.

US Continuing Jobless Claims and the Fed Rate Path

Meanwhile, US Jobless Claims could influence investor bets on a September Fed rate cut.

Economists forecast Continuing Jobless Claims to increase from 1,867k in the week ending July 6 to 1,869k in the week ending July 13.

A continued softening in labor market conditions could affect wage growth and lower disposable income. Downward trends in disposable income could impact consumer spending and dampen demand-driven inflation. A softer inflation outlook may raise bets on multiple 2024 Fed rate cuts.

A more dovish Fed rate path would narrow interest rate differentials and signal a USD/JPY drop below 150.

Short-term Forecast: Bearish

USD/JPY trends hinge on inflation numbers from Tokyo and the US (Fri). Higher inflation numbers from Japan could greenlight a July BoJ rate hike and cut to JGB purchases. Conversely, softer US data could support expectations of multiple 2024 Fed rate cuts. Interest rate differentials would narrow and support a USD/JPY drop below 150 to target the 145 handle.

Investors should remain alert. 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 sat below the 50-day EMA while hovering above the 200-day EMA. The EMAs sent bearish near-term but bullish longer-term price signals.

A USD/JPY breakout from 155 could give the bulls a run at the 50-day EMA. A break above the 50-day EMA could signal a return to 160.

US GDP, Jobless Claims, and Bank of Japan commentary require consideration on Thursday.

Conversely, a fall through the 153 handle could give the bears a run at the 200-day EMA and the 151.685 support level. A drop below the 151.685 support level would bring sub-150 into view.

The 14-day RSI at 28.44 shows the USD/JPY sitting in oversold territory. Selling pressure could intensify at the Wednesday low of 153.105.