USD/JPY Extends Winning Streak on Tariff and Inflation Shocks
The USD/JPY pair experienced heightened volatility last week, dropping to a low of 149.326 before soaring to a high of 151.208.
US tariff developments rattled markets, while inflation data raised expectations of a more hawkish Fed stance, driving US dollar demand. However, inflation numbers for Tokyo raised bets on a May Bank of Japan rate hike, triggering a Friday pullback. The pair still ended the week up 0.35% at 149.815.
Looking ahead, the focus turns to Japan’s economy amid mounting global economic uncertainty. Domestic consumption and labor market trends will give insights into the inflation outlook. Meanwhile, Q1 Tankan surveys may reflect sentiment ahead of potential tariff impacts.
Japan Retail Sales in Focus
Retail sales data, on Monday, March 31, could influence USD/JPY trends and the BoJ’s policy outlook. Economists forecast retail sales to rise 0.1% month-on-month in February, down from 0.5% in January.
A higher print could suggest demand-driven inflation, bolstering bets on a May BoJ rate hike. Conversely, weaker figures may indicate softer inflationary pressures, supporting a less hawkish policy stance.
Labor Market Data and Wage Trends
On Tuesday, April 1, labor market trends will also be crucial for the BoJ. Economists expect Japan’s unemployment rate and jobs/application ratio to remain steady at 2.5% and 1.26, respectively.
Falling unemployment and rising jobs versus applications could support higher wages, spending, and inflation. In this scenario, markets may boost bets on a May policy move, driving Yen demand. However, looser labor market conditions could close the door on an H1 2025 maneuver, pressuring the Yen.
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Tankan Surveys and US Tariffs
The BoJ’s Tankan surveys also need consideration on April 1, potentially reflecting sentiment toward potential US tariffs. Sharp drops in forward-looking indicators may test the BoJ’s willingness to raise rates. Given the uncertainty over the tariff fallout, non-manufacturing sector trends may carry greater weight as the BoJ eyes services to drive inflation.
Household Spending and BoJ Outlook
Household spending will offer further insight into consumption trends. Economists forecast household spending to rise 0.5% month-on-month in February after tumbling 4.5% in January. Another drop in spending could cause the BoJ to delay rate hikes, while a sharp increase may bolster the case for a May move.
Other Data to Monitor
Industrial production and final PMIs are also on tap, though unlikely to affect USD/JPY trends unless the services PMI sees significant revision.
Potential USD/JPY Moves
Key economic data from Japan and BoJ forward guidance will affect the USD/JPY pair’s price trends.
- Bullish Yen Scenario: A surge in private consumption, a tighter labor market, and hawkish BoJ signals could push USD/JPY toward the March 11 low of 146.537.
- Bearish Yen Scenario: A slump in private consumption, a looser labor market, and dovish BoJ commentary may push the pair past last week’s high of 151.208.
When Will the Bank of Japan Hike Rates?
Despite tariff-related uncertainties, Global Markets Investor signaled a potential May hike:
“BRACE for more Bank of Japan rate hikes: Average monthly wages in Japan rose by 3.1% year-over-year, the fastest rate in 32 YEARS. In line with surging inflation, this gives a green light for BoJ to hike in May.”
An H1 2025 BoJ move could support bets on further monetary policy tightening in H2 2025, signaling a bearish USD/JPY outlook.
US Services and Labor Market in Focus
US indicators will also shape market sentiment. Key reports include:
- JOLTS Job Openings (April 1).
- ADP Employment Change (April 2).
- Initial Jobless Claims (April 3).
- ISM Services PMI (April 3).
- Jobs Report (April 4).
Stronger labor data and wage growth could reinforce inflation risks and delay Fed rate cuts, lifting the dollar. Conversely, signs of labor market softening may revive rate-cut expectations and weigh on the USD.
The ISM Services PMI report will give insights into the US economy. Economists expect the ISM Services PMI to dip from 53.5 in February to 53.0 in March. Contributing around 80% to the US GDP, a softer reading could suggest the US economy has lost momentum, signaling a more dovish Fed stance. However, a higher PMI reading may delay a Fed rate cut until H2 2025, boosting US dollar demand.
Potential Price Scenarios:
- Bullish US Dollar Scenario: Higher Services PMI, falling unemployment, and rising wages could drive USD/JPY toward the March 28 high of 151.208.
- Bearish US Dollar Scenario: Softer services PMI, rising unemployment, and slower wage growth may pull the USD/JPY toward the March 11 low of 146.537.
Tariff Headlines Still in Play
Beyond the numbers, Trump’s tariff policies could overshadow the effect of crucial economic reports on the USD/JPY trajectory. An escalation in the global trade war may impact the Japanese economy, driving US dollar appetite. Conversely, a de-escalation could signal a more hawkish BoJ stance, and increase demand for the Yen.
Short-term Forecast:
USD/JPY trends this week will hinge on:
- Japan’s consumer spending and labor market data.
- US PMI and labor market data.
- Central bank commentary post-data.
- US tariff developments and retaliatory measures.
USD/JPY Price Action
Daily Chart
Despite a three-week winning streak, the USD/JPY remains below the 50-day and the 200-day EMAs, sending bearish price signals.
A break above the 50-day EMA would support a move toward the 200-day EMA. If USD/JPY breaks out from the 200-day EMA, the bulls could target 153 next.
Conversely, a drop below the 149.358 support level could signal a fall toward the March 11 low of 146.537. If USD/JPY breaks below 146.537, 145 will be the next key support level.
The 14-day Relative Strength Index (RSI) at 49.23 suggests a USD/JPY fall to 145 before entering oversold territory (RSI below 30).
Final Thoughts
With BoJ hawkishness, Fed uncertainty, and escalating trade tensions in play USD/JPY volatility could spike. Tariff developments, economic data, and central bank communication will remain key to the near-term USD/JPY trajectory.
For a deeper dive, explore our technical analysis here.