USD/JPY extended its losses as US economic indicators fueled stagflation fears while the Bank of Japan left rate hikes on the table.
The pair soared to a high of 150.917 on hotter-than-expected US inflation indicators. However, the US Jobs Report spooked investors, sparking a sharp reversal. The pair tumbled to a low of 147.287 before closing down 0.18% at 147.38.
Following last week’s BoJ monetary policy decision, investor focus turns to wage growth on Tuesday, August 5. Economists forecast average cash earnings to rise 3.2% year-on-year in June, up from 1% in May.
A sharp pickup in wage growth may boost household spending, potentially fueling demand-driven inflation. Given that private consumption contributes over 50% of Japan’s economy, increased spending may also bolster Japan’s economy. A higher inflation outlook and pickup in economic momentum would support a BoJ rate hike, lifting demand for the Yen.
Conversely, softer wage growth may dampen spending and inflation, supporting a less hawkish BoJ policy stance. Fading expectations of a rate hike would weigh on the Yen.
Later in the week, on Friday, August 8, household spending may influence the BoJ rate path. Economists expect household spending to slide 3% month-on-month in June after jumping 4.6% in May.
A sharp drop in spending could signal a softer inflation outlook, affecting Japan’s economy and lowering bets on a BoJ rate hike. On the other hand, a further rise in spending could lift expectations of a BoJ policy move.
On August 8, the BoJ’s Summary of Opinions will give further insights into board members’ views on inflation, the economy, and monetary policy, influencing demand for the Yen.
The BoJ left interest rates at 0.5% on July 31, but raised its inflation forecasts, citing the effects of higher food prices. However, the BoJ also warned it needs to assess how trade developments will affect the economy, stating:
“It is therefore necessary to pay due attention to the impact of these developments on financial and foreign exchange markets and on Japan’s economic activity and prices.”
The US and Japan reached a trade agreement last month, lowering tariffs on Japanese goods to 15%, potentially boosting Japan’s trade terms and economy.
Despite the economic uncertainties, economists expect the BoJ to raise interest rates later this year. According to the recent Reuters Poll:
In the US, key economic indicators and Fed commentary will fuel speculation about a rate cut. Key events include:
A slump in factory orders, a weaker-than-expected ISM Services PMI, and a spike in jobless claims could fuel recession fears. Deteriorating labor market conditions and a slowing economy may lift bets on a September Fed rate cut, pressuring the US dollar.
On the other hand, a pickup in services sector activity and a drop in jobless claims could support a more hawkish Fed policy stance. Fading bets on a September Fed rate cut would bolster demand for the greenback.
Following last week’s inflation and labor market data, investors should also closely monitor Fed commentary.
Potential Price Scenarios:
USD/JPY’s near-term outlook will hinge on key economic data and monetary policy signals. Expectations of monetary policy divergence could extend the pair’s losing streak into a third week.
On the daily chart, the USD/JPY trades above its 50-day Exponential Moving Average (EMA) but below the 200-day EMA. The EMAs indicate a bullish near-term but bearish longer-term bias.
A breakout above the 200-day EMA could pave the way to the 149.358 resistance level. A sustained move through 149.358 may enable the bulls to target the August 1 high of 150.917.
On the downside, a drop below the 50-day EMA would bring the crucial 145 support level into play. Increased selling pressure could open the door to May and June’s 142.5 support level.
The 14-day Relative Strength Index (RSI) sits at 50.80, indicating USD/JPY could climb to 150.917 before entering overbought territory (RSI > 70).
The USD/JPY may continue to experience heightened volatility amid shifting sentiment toward Fed and BoJ policy outlooks. Key macroeconomic data and central bank policy rhetoric will affect USD/JPY trends. Monitoring real-time developments will be crucial in navigating short-term movements.
Bookmark our real-time updates to stay ahead of USD/JPY volatility and consult our economic calendar.
With over 28 years of experience in the financial industry, Bob has worked with various global rating agencies and multinational banks. Currently he is covering currencies, commodities, alternative asset classes and global equities, focusing mostly on European and Asian markets.