USD/JPY Weekly Forecast: Retail Sales and Unemployment Put the BoJ in the Spotlight

Highlights

• The USD/JPY gained 0.18% in the week ending December 22, closing the week at 142.387.
• US economic indicators signaled a robust US economy, testing bets on a Q1 2024 Fed rate cut.
• The US housing sector, Japanese employment, and Japanese retail sales are focal points in the coming week.

Weekly Overview of the USD/JPY in the Week Ending December 22, 2023

The USD/JPY gained 0.18% in the week ending December 22, 2023, closing the week at 142.387. In the previous week, the USD/JPY slid by 1.95%. The USD/JPY rose to a Tuesday high of 144.954 before falling to a Friday low of 141.861.

USD/JPY Analysis: Japanese Economic Indicators to Put the BoJ in the Spotlight

On Tuesday, all eyes will be on the Japanese labor market, which could significantly impact the Japanese Yen. If labor market conditions tighten, this aligns with expectations of increased wages. An uptick in wage growth could stimulate consumer spending and lead to demand-driven inflationary pressures.

Notably, the direction of wage growth trends could force the Bank of Japan to discuss a pivot from negative rates.

Economists forecast the Japanese unemployment rate to hold steady at 2.5%.

In December, the Bank of Japan kept interest rates in negative territory. The BoJ avoided discussing a shift away from negative rates. However, the upcoming employment data could force a change in forward guidance.

Moving on to Thursday, investors must consider retail sales figures. A rebound in retail sales could potentially refuel bets on the Bank of Japan exiting negative interest rates. An upward trajectory in consumer spending would contribute to demand-driven inflation and might further prompt the BoJ to discuss a pivot from negative rates.

Economists predict retail sales will increase by 0.3% in November after sliding by 1.6% in October.

There are other statistics, such as finalized industrial production numbers on Thursday. However, these figures will likely take a back seat to the influential employment and retail sales data.

Beyond the numbers, investors must monitor Bank of Japan commentary. Governor Kazuo Ueda is on the calendar to speak on Monday. We expect USD/JPY sensitivity to comments about inflation, the economic outlook, and monetary policy.

US Housing Sector and Labor Market in Focus

On Tuesday, investor attention will be on the Chicago Fed National Activity Index and house price data. Housing sector numbers may have more impact. Investors consider housing sector data a litmus test of the US economy.

The markets consider upward trends in house prices as a positive signal, indicative of a robust US economy. A healthy housing sector can boost consumer confidence, signaling upticks in consumer spending and demand-driven inflation.

Economists forecast the S&P/Case-Shiller Home Price Index to increase by 0.2% in October. Year-over-year, economists expect the Index to rise by 5.0% vs. 3.9% in September.

US jobless claims data will garner investor interest on Thursday. Stable figures suggest a tight labor market, which, in turn, can support wage growth and disposable income. Rising disposable income trends can stimulate consumer spending and demand-driven inflation.

A sticky inflation environment could lead to adjustments to the Fed rate path projection. A more hawkish rate path projection would aim at curbing spending to tame inflation.

Economists forecast initial jobless claims to increase from 205k to 210k in the week ending December 23, 2023.

The week concludes with the Chicago PMI numbers for December. Economists anticipate a sharp decline in activity. Weak figures could rekindle concerns about a hard landing. Economists predict the Chicago PMI to decline from 55.8 to 51.0 in December.

USD/JPY Short-term Forecast

Near-term USD/JPY trends will hinge on Japanese employment and retail sales figures. A pickup in consumer spending and tighter labor market conditions could allow the BoJ to pivot from negative rates. Expectations of a BoJ exit from negative rates vs. bets on a Q1 2024 Fed rate cut tilt monetary policy divergence toward the Yen.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to the 143.500 handle would support a break above the 200-day EMA. A move through the 200-day EMA would bring the 144.713 resistance level into play.

US housing sector, the US labor market numbers, BoJ Gov. Ueda, Japanese unemployment, and Japanese retail sales need consideration.

However, a fall below the 142.177 support level would give the bears a run at the 139.359 support level. Hawkish Bank of Japan commentary could sink the USD/JPY.

The 14-day RSI at 35.65 indicates a USD/JPY drop below the 142 handle before entering oversold territory.

4-Hourly Chart

The USD/JPY remained below the 50-day and 200-day EMAs, affirming bearish price signals.

A USD/JPY break above the 50-day EMA would give the bulls a run at the 144.713 resistance level.

However, a fall through the 142.177 support level would bring the 139.359 support level into play.

The 14-period 4-hour RSI at 43.75 suggests a USD/JPY drop below the 141.500 handle before entering oversold territory.