Japanese Yen and Aussie Dollar Forecasts: Tokyo Inflation Cools, US and China in Focus

Tokyo Inflation Cools: Will the BoJ Close the Door on Rate Hikes?

On Friday, July 25, Inflation numbers from Tokyo spotlit the Bank of Japan and the USD/JPY pair as the dust settled from the US-Japan trade deal euphoria.

Tokyo’s annual inflation rate dropped from 3.1% in June to 2.9% in July. Meanwhile, Tokyo’s CPI ex food and energy, also known as core core, rose 2.9% year-on-year in July, easing from 3.1% in June. Despite cooling, inflation remained well above the BoJ’s 2% target, leaving a 2025 rate hike on the table.

July’s inflation numbers followed the US-Japan trade deal, which will give the BoJ some clarity on levies. However, board members will likely need time to assess the effect of a sweeping 15% tariff on Japanese goods, company profits, the labor market, and the broader economy.

On Wednesday, July 23, BoJ Deputy Governor Shinichi Uchida stated that the Bank will assess the potential impact of the new trade deal on Japan’s economy and inflation. Despite the current uncertainty about tariffs and Japan’s economic outlook, the Deputy Governor signaled further rate hikes, stating:

“Given that real interest rates are at significantly low levels […] the bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate.”

The USD/JPY pair moved from 147.114 to 146.960 in response to the moderately softer inflation numbers.

USD/JPY Daily Outlook: Durable Goods and the US Dollar

Later in the session on Friday, US durable goods orders will provide insights into the demand environment. Economists forecast durable goods orders, excluding transport, to rise 0.1% in June month-on-month after May’s 0.5% increase.

Better-than-expected numbers could signal a robust demand environment, potentially lifting sentiment toward the US economy. An improving macroeconomic backdrop may temper bets on a Fed rate cut, potentially sending USD/JPY toward 147.5 and the 200-day EMA. On the other hand, a drop in orders may boost expectations of a September Fed rate cut, pushing the pair toward the 50-day EMA. A drop below the 50-day EMA may expose the crucial 145 support level.

USD/JPY: Key Scenarios to Watch

• Bearish USD/JPY Scenario: Hawkish BoJ signals or weaker US durable goods orders. Such factors could send USD/JPY toward the 50-day EMA and potentially the 145 level.
• Bullish USD/JPY Scenario: Dovish BoJ cues or strong US data. These may drive the pair toward the 200-day EMA, exposing the 147.5 level.

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

AUD/USD: US-China Trade Developments in Focus

Turning to the AUD/USD pair, US-China trade headlines will influence appetite for the Aussie dollar.

Rising expectations of a trade agreement with lower tariffs on China may bolster demand for Chinese goods. Given China accounts for one-third of Aussie exports and Australia’s over 50% trade-to-GDP ratio, increased demand may support a less dovish RBA rate stance. On the other hand, rising US-China tensions could affect external demand for Chinese goods. A weaker demand outlook may raise bets on multiple RBA rate cuts and weigh on the Aussie dollar.

During the July press conference, RBA Governor Michele Bullock highlighted the importance of demand from China, stating:

“On tariffs, there will be an impact on us, partly driving deflationary forecasts, but the impact on Australia will likely be less severe than on the US. Trade terms with China remain crucial. If China bolsters its economy with fiscal stimulus, that could cushion the impact of tariffs on Australia’s economy.”

AUD/USD: Key Scenarios to Watch

• Bearish AUD/USD Scenario: Renewed US-China trade tensions, dovish RBA rhetoric, or absence of stimulus pledges from Beijing. These factors could push AUD/USD toward the $0.6550 level.
• Bullish AUD/USD Scenario: A US-China trade deal, hawkish RBA cues, or fresh policy support from Beijing. These factors could send AUD/USD toward the $0.6650 level.

Click here for a more comprehensive analysis of AUD/USD trends and trade data insights.

AUD/USD Daily Outlook: Durable Goods Orders and Rate Differentials

Later today, US durable goods orders will likely influence US-Australian interest rate differentials and US dollar demand.

Better-than-expected orders would indicate a further pickup in demand, tempering expectations of a September Fed rate cut. A less dovish Fed rate path would widen the rate differential in favor of the US dollar, pushing AUD/USD toward $0.6550. Sustained selling pressure may expose the 50-day EMA.

However, a sharp drop in orders may suggest a weakening economic backdrop, supporting a Q3 Fed rate cut. A more dovish Fed rate path could narrow the rate differential and drive AUD/USD toward the $0.6650 level.

Key Market Drivers to Watch Today:

• USD/JPY: BoJ policy rhetoric.
• USD/JPY and AUD/USD: US durable goods orders and broader trade developments.
• AUD/USD: US-China trade headlines and Beijing’s stimulus cues.

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