USD/JPY Forecast: Balancing BoJ’s Warning Signals with US Durable Goods Orders

Inflation Trends and the Bank of Japan’s Interest Rate Trajectory

On Wednesday, investors may begin to focus on the Friday, April 26, session. Inflation numbers from Tokyo need consideration after recent comments from Bank of Japan Governor Kazuo Ueda.

The Bank of Japan Governor spoke on Tuesday (April 23), warning about rate hikes if inflation continued to accelerate toward the 2% target.

On Friday, inflation numbers from Tokyo must exceed expectations to draw the interest of the BoJ. Economists forecast the core annual inflation rate to ease from 2.4% to 2.2% in April. Softer inflationary pressures would leave the Bank of Japan inflation forecasts to guide the markets.

Projections for inflation to move toward the 2% target would support further interest rate hikes and pressure the USD/JPY.

Service PMI numbers for April signaled a likely pickup in demand-driven inflationary pressures. Input and output prices trended higher. Nevertheless, the Bank of Japan may also need to consider the effects of the weaker Yen on import costs on domestic demand.

Despite warnings of further interest rate hikes, the USD/JPY hovers below the 155 handle. The markets expect the Japanese Government to take steps to bolster the Yen at 155.

US Economic Calendar: Core Durable Goods Orders

On Wednesday, US core durable goods orders warrant investor attention. Following weaker-than-expected private sector PMI numbers for April, investors may be sensitive to the figures.

Economists forecast core durable goods orders to increase by 0.3% in March after rising by 0.5% in February. Moreover, economists predict durable goods orders to advance by 2.5%. In February, durable goods orders increased by 1.3%.

Better-than-expected numbers could support investor expectations the US economy will avoid a recession. However, the numbers are unlikely to influence the Fed’s interest rate trajectory. The US Personal Income and Outlays Report (Fri) will impact bets on a September Fed rate cut.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on inflation numbers from Japan and the US and the Bank of Japan. Softer-than-expected inflation numbers from Japan could allow the Bank of Japan to support a zero-interest rate environment over the near term.

Sticky US inflation numbers and upward trends in personal income and spending could tilt monetary policy divergence further toward the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY remained comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY breakout from the April 23 high of 154.874 could give the bulls a run at the 155 handle.

Investors should consider the Bank of Japan, intervention chatter, and US core durable goods orders.

Conversely, a USD/JPY fall through the 154 handle could signal a drop toward the 151.685 support level.

The 14-day RSI at 75.43 shows the USD/JPY in overbought territory. Selling pressure will likely increase at the April 23 high of 154.874.