USD/JPY Weekly Forecast: BoJ Eyes Services PMI, Wages, and Household Spending

Weekly Overview of the USD/JPY in the Week Ending May 3, 2024

The USD/JPY tumbled 3.38% in the week ending May 3, closing the week at 152.928. The USD/JPY surged to a Monday high of 160.209 before sliding to a Friday low of 151.856.

USD/JPY Analysis: The Services PMI and Household Spending in Focus

Finalized services sector PMI numbers from Japan will warrant investor attention on Tuesday (May 7). According to the flash survey, the Jibun Bank Services PMI increased from 54.1 to 54.6 in April. Upward revisions to the preliminary numbers could impact buyer demand for the USD/JPY.

The Bank of Japan hopes the services sector will contribute to inflation and allow for a higher interest rate environment. Investors should also consider the sub-components, including input prices, employment, and new orders.

Average cash earnings will garner investor interest on Thursday (May 9). Economists forecast average cash earnings to increase 1.5% year-on-year in March after rising 1.8% in February.

Higher-than-expected wages would fuel buyer appetite for the Japanese Yen. Upward trends in wages could increase disposable income and consumer spending. Consumer spending could fuel demand-driven inflation and allow the BoJ to raise interest rates.

On Friday (May 10), household spending numbers will attract the interest of the Bank of Japan. Economists forecast household spending to fall 2.4% year-on-year in March after declining 0.5% in February.

Weaker-than-expected numbers could temper investor expectations of a near-term BoJ interest rate hike. Downward trends in household spending could dampen demand-driven inflation and the need for a more hawkish policy stance.

With the services sector, wages, and household spending in focus, investors should also consider BoJ commentary. Views on the economic outlook, inflation, and interest rate hikes could move the dial.

US Economic Calendar: Jobless Claims, Consumer Sentiment, and the Fed

On Tuesday (May 7), the RCM/TIPP Economic Optimism Index will draw investor interest. Economists forecast the Index to increase from 43.2 to 44.1 in May.

Recent economic indicators, including the ISM Services PMI, suggest the US economy may be losing momentum. However, better-than-expected numbers could fuel expectations of the US economy avoiding a recession. Nevertheless, sub-50 indicates pessimism toward the economic outlook.

The US labor market will be in focus on Thursday (May 9). Higher-than-expected jobless claims could impact buyer demand for the USD/JPY.

Weaker labor market conditions could impact wage growth and consumer confidence. The net effect could be a pullback in consumer spending and softer demand-driven inflationary pressures. An unexpected spike in jobless claims could support investor bets on a September Fed rate cut.

Economists forecast initial jobless claims to increase from 208k to 210k. Figures above 220k could move the dial after the US Jobs Report.

On Friday (May 10), the Michigan Consumer Sentiment Survey will also need consideration. Economists forecast the Michigan Consumer Sentiment Index to fall from 77.2 to 77.0 in May.

Weaker consumer sentiment figures could signal a downward trend in consumer spending. Softer consumer spending could dampen demand-driven inflation and support a more dovish Fed rate path. However, investors must also consider the sub-components, including the Michigan Inflation Expectations Index.

Economists forecast the Michigan Inflation Expectations Index to decline from 3.2% to 3.1% in May.

Beyond the numbers, investors should monitor FOMC member chatter. Reactions to the recent inflation numbers and the US Jobs Report could move the dial. FOMC members Thomas Barkin (Mon), John Williams (Mon), Neel Kashkari (Tues), Christopher Jefferson (Wed), Lisa Cook (Wed), Michelle Bowman (Fri), Austan Goolsbee (Fri), and Michael Barr (Fri) are on the calendar to speak.

Short-term Forecast

Near-term USD/JPY trends will hinge on services sector data, wage growth, and household spending numbers from Japan. Upbeat numbers could raise investor expectations of a near-term BoJ rate hike. Nevertheless, US labor market data, consumer sentiment numbers, and Fed chatter must support a September Fed rate cut to significantly impact the USD/JPY.

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 the 155 handle would support a move to the 160 level. A break above 160 would give the bulls a run at the Monday (April 29) high of 160.209.

Economic data from Japan and the US and central bank commentary need consideration.

Conversely, a USD/JPY break below the 50-day EMA and the 151.685 support level could bring sub-150 into play.

The 14-day RSI at 45.90 suggests a USD/JPY drop below 150 before entering oversold territory.