USD/JPY Forecast: Services Data, Fed Talk to Drive Yen’s Price Action

The Jibun Bank Services PMI and the Bank of Japan

On Tuesday (May 7), finalized service sector PMI numbers from Japan will put the USD/JPY and the Bank of Japan in focus. According to preliminary numbers, the Jibun Bank Services PMI increased from 54.1 to 54.6 in April.

Upward revisions to the preliminary PMI could raise expectations of a nearer-term BoJ interest rate hike.

The services sector contributes over 60% to the Japanese economy. Upward trends in service sector activity would signal an improving macroeconomic environment. However, investors should consider the sub-components, including employment and input prices.

The Bank of Japan hopes the services sector can contribute to demand-driven inflation and enable the BoJ to raise interest rates.

Tighter labor market conditions and higher wages could fuel input and output prices, translating into higher consumer price trends. Higher consumer price trends could enable the BoJ to begin rate hike discussions to provide price stability.

With the services sector in focus, investors should also monitor BoJ commentary throughout the session. Views on inflation and interest rate hikes could move the dial.

US Economic Calendar: RCM/TIPP Economic Optimism Index and the Fed

Later in the Tuesday session, the RCM/TIPP Economic Optimism Index will warrant investor attention. Economists forecast the Index to increase from 43.2 to 44.1 in May.

The April US Jobs Report and ISM Services PMI signaled a weaker labor market and macroeconomic environment. An unexpected fall in the Index could test investor expectations of the US avoiding an economic recession. Nonetheless, the numbers are unlikely to influence the Fed rate path.

FOMC members remain focused on the services sector, wage growth, consumption, and consumer price trends.

Beyond the numbers, investors should monitor FOMC member commentary. Reactions to the US Jobs Report and recent inflation figures could move the dial. FOMC member Neel Kashkari is on the calendar to speak.

Short-term Forecast

Near-term trends for the USD/JPY hinge on service sector data, wage growth, and household spending figures from Japan. Better-than-expected numbers could fuel speculation about a BoJ interest rate hike. However, investors should also consider Fed chatter amidst rising expectations of a September Fed rate cut.

USD/JPY Price Action

Daily Chart

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

A USD/JPY break above the 155 handle would support a move toward the 158 handle. A return to the 158 handle could give the bulls a run at the April 29 high of 160.209.

Service sector PMI numbers from Japan and central bank commentary warrant investor attention.

Alternatively, a USD/JPY break below the 50-day EMA could signal a drop to the 151.685 support level.

The 14-day RSI at 51.33 indicates a USD/JPY move to the 158 handle before entering overbought territory.