Japanese Yen Weekly Forecast: Will USD/JPY Break 150? US-Japan Trade Talks Hold the Key

USD/JPY Soars as Trade Developments Hit BoJ Policy Bets

USD/JPY soared as President Trump’s tariffs impacted expectations of a Bank of Japan rate hike, widening the US-Japan interest rate differential in favor of the US dollar. US labor market data and airline earnings and forecasts signaled a resilient economy, boosting US dollar demand.

USD/JPY slipped briefly to a low of 144.221 before soaring to a high of 147.521. Despite a modest pullback, the pair ended the week up 2.01% at 147.405.

Outlook: Trade Talks, Inflation, and Central Banks in Focus

US-Japan trade developments will continue to drive USD/JPY trends. President Trump announced a 25% tariff on Japanese goods, effective August 1. Higher tariffs may further weaken demand for Japanese goods, company profits, and potentially wage growth. Weaker trade terms and softer wage growth could weigh on sentiment and household spending.

The net effect would be a loss of economic momentum and a cooler inflation outlook, potentially curbing expectations of a Bank of Japan rate hike.

Meanwhile, key economic indicators will give investors insights into the effects of tariffs.

Machinery Orders in Focus

On Monday, July 14, machinery order numbers from Japan will reflect business sentiment and potentially wage growth trends. Economists forecast machinery orders to fall 1.5% month-on-month in May, following April’s 9.1% plunge.

Weaker-than-expected orders could signal waning business sentiment, potentially curbing investment. Falling investment and cost controls may pressure wage growth, dampening consumer spending. A pullback in spending may dampen inflation, supporting a less hawkish BoJ rate path.

Conversely, rising orders could boost sentiment and wages, reviving BoJ rate hike bets. Sentiment toward the BoJ’s policy stance would influence Yen demand.

Trade Terms to Spotlight the BoJ as Trade Tensions Rise

Japan’s trade data will face scrutiny on Thursday, July 17. Economists forecast exports to rise 0.5% year-on-year in June after falling 1.7 in May while expecting imports to drop 1.7% (May: -7.7%).

Weaker-than-expected trade terms can impact company earnings and the labor market and potentially delay BoJ policy moves. A less hawkish BoJ stance would pressure the Yen. Conversely, stronger-than-expected trade data would signal a pickup in demand for Japanese goods, raising expectations of a 2025 rate hike.

While the trade data will influence the BoJ’s policy stance, trade developments will remain the key driver for USD/JPY. A 25% US tariff on Japanese goods could adversely affect Japan’s economy and temper BoJ rate hike expectations. On the other hand, a US-Japan trade deal may boost demand for Japanese goods, supporting a more hawkish BoJ policy outlook.

Will Inflation Trends Close the Door on a BoJ Rate Hike?

On Friday, July 18, inflation figures for Japan could shift sentiment toward the BoJ’s rate path. Economists forecast the annual inflation rate to drop from 3.5% in May to 3.3% in June while expecting core inflation to fall to 3.3% (May: 3.7%).

Softer-than-expected inflation may sink expectations of further monetary policy tightening, weighing on the Yen. However, higher inflation readings could boost Yen appetite on rising rate hike bets.

Economists Flag Easing Food Price Trends

Producer prices rose 2.9% YoY in June, down from 3.3% in May, signaling a softer inflation outlook. The USD/JPY pair climbed higher in response to the numbers. East Asia Econ commented on last week’s numbers, stating:

“Japan – goods prices starting to reverse. Data today show more feed through into PPI from the easing of import prices. Weekly rice prices have also dropped again. These trends lower goods price inflation but will boost household spending power. At the same time, the sharp fall in auto export prices shows the negative impact of tariffs.”

USD/JPY Outlook: Trade Developments, Economic Indicators, and the BoJ

• Bullish Yen Scenario: Strong Japanese data, hawkish BoJ signals, or a US-Japan trade deal could push USD/JPY toward 145.
• 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, dovish BoJ rhetoric, or stalled US-Japan trade talks may drive the pair toward 150.

US Data to Dictate the Fed Rate Path and Dollar Demand

In the US, inflation, retail sales, labor market, and consumer sentiment data will influence the Fed rate path and appetite for the US dollar.

Key events include:

• US CPI Report (July 15): Annual inflation rate forecast to rise from 2.4% in May to 2.6% in June.
• Producer Prices (July 16): Forecast to increase 2.8% YoY in June, up from 2.6% in May.
• Retail Sales (July 17): Forecast to rise 3.6% YoY in June after May’s 3.3% increase.
• Initial Jobless Claims (July 10): Expected to drop from 227k (week ending July 5) to 225k (week ending July 12).
• Michigan Consumer Sentiment (July 18): Forecast to rise from 60.7 in June to 61.5 in July.

Softer inflation, weaker retail sales, a spike in jobless claims, and a drop in sentiment may fuel Fed rate cut bets, weighing on US dollar demand. Conversely, hotter inflation, pickups in retail sales and sentiment, and lower jobless claims may signal a more hawkish Fed stance, boosting the US dollar.

Beyond the data, Fed speakers will drive US dollar and USD/JPY trends.

Potential Price Scenarios:

• Bullish US Dollar Scenario: Strong US data, hawkish Fed rhetoric, and easing global trade tensions may drive USD/JPY toward 150.
• Bearish US Dollar Scenario: Weak US data, dovish Fed cues, and escalating trade tensions could pull USD/JPY toward 145.

Short-term Forecast:

USD/JPY’s near-term outlook will hinge on trade developments, key economic data, and monetary policy guidance. Among these, trade developments will likely be the most influential in the week ahead.

USD/JPY Price Action

Daily Chart

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

A breakout above the 200-day EMA and 148 could pave the way to the 149.458 resistance level. Sustained buying pressure may bring the March high of 151.301 into play.

On the downside, a drop below the 50-day EMA and the crucial 145 support level could enable the bears to target 142.5, a crucial support level in May and early June.

The 14-day Relative Strength Index (RSI) sits at 63.06, indicating USD/JPY can climb to 150 before entering overbought territory (RSI > 70).

Key Takeaway

The USD/JPY faces increased volatility as trade headlines, macroeconomic data, and central bank policy stances drive sentiment. Monitoring real-time developments will be crucial in navigating short-term movements.

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