Japanese Yen and Aussie Dollar Forecasts: Core-Core Inflation 3%, US Inflation Up Next

Inflation, Retail Sales, and Labor Market Data Lift BoJ Rate Hike Odds

BoJ rate hike odds surge as Japan’s inflation sticks above target, pressuring the USD/JPY pair.

Tokyo’s so-called core-core inflation rate eased from 3.1% in July to 3% in August, holding well above the BoJ’s 2% target. Despite softer inflation, the August figures pointed to sticky national inflation, supporting a hawkish BoJ policy stance.

Falling unemployment reinforced expectations of monetary policy tightening in the fourth quarter. Notably, a tighter labor market may bolster wage growth, fueling household spending and demand-driven inflation.

StockMarketNews recently commented on rising wages and inflation, stating:

“A tight labor market is fueling this. Companies are being forecast to raise wages, which boosts household income and spending. More spending sustains higher prices. Once wage growth feeds inflation, it becomes harder for a central bank to ignore. Japan is reaching that point.”

The USD/JPY dropped from 146.933 to 146.820 after the data release, reflecting sentiment toward the BoJ’s rate path.

Consumer Confidence in the Spotlight

Later this morning, Japanese consumer confidence figures also require consideration. Economists forecast consumer confidence to fall from 33.7 in July to 33.5 in August.

A sharper drop toward the April low of 31.2 could signal a pullback in private consumption, challenging bets on a BoJ rate hike. On the other hand, a higher reading may boost demand for the Yen on a potential uptrend in consumer spending.

USD/JPY Daily Outlook: Personal Income and Outlays Report to Fuel Market Volatility

Later in the session on Friday, the US Personal Income and Outlays Report will be the main event. Economists expect the Core PCE Price Index to rise 2.9% year-on-year in July after June’s 2.8% increase.

A sharper increase in the Fed’s inflation measure could sink bets on a September Fed rate cut, boosting US dollar demand. A more hawkish Fed policy stance may send USD/JPY above the 50-day Exponential Moving Average (EMA) toward the 200-day EMA. A break above the 200-day EMA may pave the way to the 149.358 resistance level.

However, softer inflation could fuel bets on multiple Fed rate cuts, potentially pushing the pair below 146. If breached, 145 would be the next key support level.

Forex markets currently face the prospect of the BoJ and the Fed diverging on monetary policy, potentially triggering USD/JPY volatility.

The Kobeissi Letter recently compared Japan and the US inflation backdrop, stating:

“Japan’s Core CPI inflation is now above US Core CPI inflation for the first time in 48 years, excluding periods of sales tax hikes. Japan’s Core CPI was 3.4% in July, one of the highest readings since the 1980s. By comparison, US core CPI inflation was 3.1%. Japan’s core inflation has now been above the Bank of Japan’s 2% target for 40 consecutive months.”

USD/JPY: Key Scenarios to Watch

• Bearish USD/JPY Scenario: Hawkish BoJ guidance, softer US inflation, or dovish Fed signals could drag USD/JPY toward 145.
• Bullish USD/JPY Scenario: Dovish BoJ cues, hotter-than-expected US inflation, or hawkish Fed rhetoric may send the pair toward the 150.

See today’s full USD/JPY forecast with chart setups and trade ideas.

While speculation intensifies over the BoJ, the RBA also faces scrutiny, with markets expecting an RBA rate cut in November.

AUD/USD: Private Sector Credit in Focus

Turning to the AUD/USD pair, Australian private sector credit could provide insights into credit demand and household spending. Economists forecast private sector credit to rise 0.6% month-on-month in July, mirroring June’s upswing.

A larger increase may signal a pickup in consumer spending, potentially fueling inflation. A higher inflation outlook may temper expectations of a Q4 RBA rate cut. Conversely, a softer print may support a more dovish RBA rate path, weighing on the Aussie dollar.

Why do private sector credit trends matter for the RBA?

The RBA considers its monetary policy somewhat restrictive despite August’s rate cut. Restrictive policy typically curbs credit demand and consumption, cooling inflationary pressures. If credit demand and consumption rise, the RBA may hold cash rates steady or even hike rates to counter demand.

When do economists expect the RBA to cut rates again?

AMP Head of Investment Strategy and Chief Economist Shane Oliver remarked on the RBA’s Meeting Minutes, stating:

“RBA minutes reiterated dovish guidance, noting the cash rate is ‘still somewhat restrictive’ & ‘some further reduction in the cash rate over the coming year’ is likely required, with reference to the pace being gradual and data determined. We expect cuts in Nov, Feb & May to 2.85%.”

Private sector credit would have to fall sharply in July to raise bets on a September RBA rate cut.

AUD/USD: Key Scenarios to Watch

• Bearish AUD/USD Scenario: Weaker private sector credit or dovish RBA rhetoric. These factors could push AUD/USD toward the 50-day EMA, bringing the 200-day EMA and $0.6450 into play.
• Bullish AUD/USD Scenario: Rising private sector credit or hawkish RBA cues. These factors could send AUD/USD toward the $0.6550 resistance level, paving the way toward the $0.66 level.

Explore our full AUD/USD analysis, including key trends and trade data, here.

AUD/USD Daily Outlook: Will US Inflation Sink Rate Differentials?

While markets are betting on a November RBA rate cut, uncertainty lingers about the Fed’s rate path beyond September. Today’s Personal Income and Outlays Report may give traders important clues.

Hotter-than-expected inflation would dampen Q4 Fed rate cut bets, widening the interest rate differential in favor of the US dollar. A wider rate differential may push AUD/USD toward the 50-day EMA, exposing the 200-day EMA.

On the other hand, softer inflation would narrow the rate differential, driving AUD/USD toward the $0.66 level.

Key Market Drivers to Watch Today:

• USD/JPY: BoJ commentary and Japanese consumer confidence.
• USD/JPY and AUD/USD: US Personal Income and Outlays Report and Fed speakers.
• AUD/USD: Aussie private sector credit and RBA chatter.

For more in-depth analysis, review today’s USD/JPY and AUD/USD trading setups in our latest reports and consult the economic calendar.