USD/JPY Weekly Forecast: Bearish Outlook on US Data and Hawkish BoJ Stance

USD/JPY Tumbles to the Lowest Level Since January 2024

The USD/JPY tumbled 4.72% to 146.472 for the week ending August 2. It had risen to a Tuesday high of 155.216 before sliding to a Friday low of 146.414.

The Bank of Japan’s monetary policy decision and increasing bets on multiple 2024 Fed rate cuts sank the USD/JPY.

Japan Services PMI and Inflation

On Monday, August 5, finalized services PMI numbers will influence buyer appetite for the USD/JPY. According to the flash survey, the Jibun Bank Services PMI increased from 49.4 in June to 53.9 in July, signaling an improving macroeconomic environment. The services sector accounts for over 70% of the Japanese economy.

However, investors should also consider employment and price subcomponents. Upward trends in job creation and prices could signal rising consumer prices and a more hawkish BoJ rate path. Tighter labor market conditions may support wages and increase disposable income, fueling consumption and demand-driven inflation.

S&P Global Market Intelligence Economist Usamah Bhatti commented on the July survey, saying,

“Activity at Japanese private sector firms returned to expansion territory at the start of the third quarter of 2024 […]. Service providers led the expansion and saw activity growth hit a three-month high […]. There were also further positive movements on the employment side […]. At the same time, firms continued to note stubbornly high input prices.”

Wage Growth and Consumption Outlook

Average cash earnings will draw investor interest on Tuesday, August 6.

Economists forecast average cash earnings to increase by 2.3% year-on-year in June, up from 1.9% in May.

Higher cash earnings can fuel investor bets on a Q4 2024 Bank of Japan rate hike. Higher wages can increase disposable income, fueling consumer spending and demand-driven inflation. Investors could show more sensitivity to wage growth trends after the BoJ’s July monetary policy decision. A stronger Yen could reduce import costs and consumer prices, supporting a pickup in private consumption.

Japan Household Spending

Household spending remains a crucial data release on Tuesday. Economists expect household spending to decline by 0.9% year-on-year in June, up from 1.8% in May.

A pickup in household spending could fuel demand-driven inflation and support the Japanese economy. Private consumption contributes over 50% to the Japanese economy and impacted it in Q1 2024. The Japanese economy contracted by 0.5%, with private consumption falling by 0.7%.

Higher household spending and an improving macroeconomic environment could support a more hawkish BoJ rate path. Bets on a Q4 2024 BoJ rate hike could lead to a USD/JPY drop toward 140.

Bank of Japan Summary of Opinions

The Bank of Japan will release its Summary of Opinions on Thursday, August 8. The summary of opinions will give investors more insight into the July monetary policy decision and Board member views on the interest rate trajectory. Support for multiple interest rate hikes could boost Yen demand.

Expert Views on the Bank of Japan’s Monetary Policy Outlook

Alicia Garcia Herrero commented on the Bank of Japan’s monetary policy decision, stating,

“The recent BoJ’s meeting was way better than the June meeting, went with full win with an interest rate hike and the announcement of the reduction of bond purchases. The reaction would be positive as only one out of four BoJ watchers were expecting a hike, which go beyond the market expectation. But we need to be careful with the 10-year JGB yield, as the Ministry of Finance would not be happy if it was hiked too fast.”

Overview of the US Dollar

Meanwhile, it will be another pivotal week for the US dollar amid surging bets on multiple 2024 Fed rate cuts.

Will the US ISM Services PMI Cement Three Fed Rate Cuts?

On Monday, August 5, the ISM Services PMI will influence sentiment toward the US economy and Fed rate path.

Economists expect the ISM Services PMI to increase from 48.8 in June to 51.0 in July. Higher-than-expected PMI numbers could ease investor fears of a hard US landing. The services sector accounts for about 80% of the US economy. Better-than-expected numbers could lure dip buyers and support a USD/JPY move toward 150.

However, investors should consider the employment and price subcomponents. Weaker job creation and price trends could support investor bets on multiple 2024 Fed rate cuts. Weaker labor market conditions may affect wage growth and reduce disposable income, dampening consumer spending and inflation.

Jobless Claims in the Spotlight

US continuing jobless claims will require consideration after the unexpected rise in the US unemployment rate.

Economists forecast US continuing jobless claims will increase from 1,877k in the week ending July 20 to 1,880k in the week ending July 27.

Higher jobless claims would reflect a weaker US labor market, affecting wage growth and disposable income. Downward trends in disposable income may dampen consumer spending and demand-driven inflation.

A weaker consumption outlook could rekindle investor fears of a hard US landing. Private consumption contributes over 60% to the US economy. Weaker labor market data would support a USD/JPY drop toward 140.

Expert Views on the US Economy and the Fed Rate Path

On Friday, Bloomberg Chief Markets Editor David Ingles stated,

“Govt bonds as a group up 8 straight days, longest streak in 4 years. Growth outlook souring, rate cuts starting to come out of the kitchen. Swaps signal 3 Fed cuts now fully priced this year. Eerily enough, last time we had an 8-day streak was when pandemic lockdowns pummeled the global economy.”

Short-term Forecast: Bearish

Near-term USD/JPY trends hinge on Services PMIs, Japan’s household spending and wage growth numbers, and US labor market data. Weaker US Services PMI and labor market data could fuel fears of a US hard landing and multiple Fed rate cuts. Conversely, upbeat numbers from Japan could support a Q4 2024 BoJ rate cut and a USD/JPY drop to 140.

Investors should remain alert in a crucial week for the USD/JPY pairing. Monitor real-time data, central bank views, and expert commentary to adjust your trading strategies accordingly. Stay informed with our latest analysis and news to navigate the FX markets.

USD/JPY Price Action

Daily Chart

The USD/JPY sat well below the 50-day and 200-day EMAs, sending bearish price signals.

A USD/JPY break above the 148.529 resistance level and trend line would support a move toward 150. Additionally, a breakout from 150 could give the bulls a run at the 151.684 resistance level.

The economic data from Japan and central bank commentary require consideration.

Conversely, a break below the 145.891 support level could signal a drop toward the 143.495 support level.

The 14-day RSI at 15.35 shows the USD/JPY in oversold territory. Buying pressure could intensify at the August 2 low of 146.414.