Japanese Yen Weekly Forecast: Will USD/JPY Break 145? BoJ and Fed Decisions in Spotlight

USD/JPY Snaps Three-Week Winning Streak

USD/JPY snapped a three-week winning streak as a US-Japan trade deal revived Bank of Japan rate hike bets, boosting Yen demand.

The pair briefly climbed to a high of 148.663 before sliding to a low of 145.853. However, despite two days of gains, USD/JPY ended the week at 147.65, down 0.77%..

Outlook: Retail Sales, the Labor Market, and the Bank of Japan in Focus

The US-Japan trade deal lifted demand for the Yen. However, uncertainty about the timeline for a BoJ rate hike limited the USD/JPY pair’s losses. The BoJ may delay rate hikes to assess the potential impact of tariffs on Japan’s trade terms, inflation, and economic outlook.

In the week ahead, the Bank of Japan’s interest rate decision and key economic data will influence Yen appetite.

Retail Sales and Industrial Production Precede BoJ Interest Rate Decision

Japan’s retail sales figures will draw market interest on Thursday, July 31. Economists forecast retail sales to stall in June after falling 0.2% in May.

Weakening private consumption could dampen demand-driven inflation and would support a less hawkish BoJ policy stance. Additionally, a pullback in consumer spending may also impact the Japanese economy, given that private consumption accounts for over 50% of the GDP.

Conversely, a rebound in retail sales may raise bets on a 2025 BoJ rate hike, bolstering Yen demand.

Meanwhile, industrial production figures for June could highlight the effect of US tariffs on the manufacturing sector. Economists forecast industrial production to fall 0.7% month-on-month after declining 0.1% in May.

A continued fall in production would support a BoJ policy hold, given that the manufacturing sector accounts for around 30% of Japan’s GDP. On the other hand, an unexpected rise in production may boost expectations of a BoJ policy move since the trade deal reduces US tariffs.

June’s numbers precede the BoJ’s interest rate decision slated for later in the Thursday session.

Bank of Japan Interest Rate Decision: Will the BoJ End Rate Hike Bets?

On July 31, the BoJ will deliver its interest rate decision, the quarterly outlook report, and new economic projections. Economists expect the BoJ to leave interest rates at 0.5%, putting the market focus on the projections, quarterly outlook report, and forward guidance.

A positive economic outlook, with inflation expected to sustainably hold above the BoJ’s 2% target, could boost rate hike bets. A more hawkish BoJ stance would weigh on USD/JPY. However, lower inflation expectations, recession fears, and a BoJ signal to hold rates steady in 2025 could impact the Yen, pushing USD/JPY higher.

The BoJ’s policy outlook will likely limit the impact of consumer confidence data released after the decision.

Japan Labor Market in the Spotlight

On Friday, August 1, labor market data will also affect USD/JPY trends. Economists expect Japan’s unemployment rate to remain at 2.5% in June. Weaker labor market conditions may curb wage growth, potentially dampening consumer spending and inflation. A softer inflation outlook could support a less hawkish BoJ rate path, impacting Yen demand. Conversely, a steady labor market may keep a rate hike on the table.

USD/JPY Outlook: Economic Indicators and the BoJ

• Bullish Yen Scenario: Upbeat Japanese data or a hawkish BoJ policy outlook could send USD/JPY toward the 50-day Exponential Moving Average (EMA).
• Yen Carry Trade Unwind Risks: A USD/JPY drop below the September 2024 low of 139.576 could accelerate the Yen Carry Trade Unwind.
• Bearish Yen Scenario: Weaker Japanese data or dovish BoJ guidance may drive the pair above the 200-day EMA, bringing 150 into play.

US Data and the Fed to Dictate Dollar Demand

In the US, crucial economic data and the Fed’s interest rate decision will spotlight the US dollar.

Key events include:

• CB Consumer Confidence Index (July 29): Expected to increase to 95.3 in July, up from 93 in June.
• GDP (July 30): Forecast to expand 2.5% quarter-on-quarter in Q2 after contracting by 0.5% in Q1.
• Fed Interest Rate Decision and Press Conference (July 31): Expected to keep interest rates at 4.5%, giving the press conference more weight.
• Personal Income & Outlays Report (July 31): Economists forecast the Core PCE Price Index to rise 2.8% year-on-year in June, up from 2.7% in May.
• US Jobs Report (August 1): Unemployment expected to rise and wage growth to slow.

Rising consumer confidence and tighter labor market conditions could bolster wage growth and boost spending. A pickup in consumer spending may fuel demand-driven inflation. Higher inflation and a potential pickup in consumer prices would support a more hawkish Fed rate path, lifting US dollar demand.

On the other hand, rising unemployment, softer wage growth, and cooling inflation may signal a more dovish Fed policy stance. Rising expectations of multiple 2025 Fed rate cuts would likely pressure the US dollar.

The Fed Policy Decision and Press Conference: Cut or Hold?

Beyond the data, the Fed’s decision and guidance will affect US dollar trends. Greater concerns about tariffs and inflation would give the Personal Income & Outlays Report greater weight on the Fed’s policy outlook. On the other hand, greater focus on the labor market would put the Jobs Report in the spotlight.

Potential Price Scenarios:

• Bullish US Dollar Scenario: Better-than-expected US data or a hawkish Fed press conference may send USD/JPY toward the 200-day EMA. A move above the 200-day EMA could pave the way to the March high of 151.208.
• Bearish US Dollar Scenario: Softer US data or dovish Fed cues could push USD/JPY toward the 50-day EMA. A break below the 50-day EMA may bring the crucial 145 support level into play.

Short-term Forecast:

USD/JPY’s near-term outlook will hinge on key economic data and monetary policy guidance.

USD/JPY Price Action

Daily Chart

On the daily chart, the USD/JPY trades above its 50-day Exponential Moving Average (EMA) but below the 200-day EMA. The EMAs signal a bullish near-term but bearish longer-term bias.

A breakout above the 200-day EMA could bring the 149.458 resistance level into play. A sustained move through 149.458 may pave the way to the March high of 151.208.

On the downside, a break below the 50-day EMA would expose the crucial 145 support level. Increased selling pressure could enable the bears to target May and June’s 142.5 support level.

The 14-day Relative Strength Index (RSI) sits at 57.11, suggesting USD/JPY could climb to 150 before entering overbought territory (RSI > 70).

Key Takeaway

The USD/JPY could face increased volatility despite the US-Japan trade deal. Key macroeconomic data and central bank policy outlooks will drive USD/JPY trends. Monitoring real-time developments will be crucial in navigating short-term movements.

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