USD/JPY Forecast: Bank of Japan, Pivot Bets, and the US CB Leading Index

Highlights

• The USD/JPY gained 0.01% on Friday, ending the session at 148.166.
• On Monday, investors will focus on the Bank of Japan and the impact of softer inflation on BoJ pivot expectations.
• Later, the US CB Leading Index needs consideration.

USD/JPY Movement on Friday

The USD/JPY gained 0.01% on Friday. After ending the Thursday session flat, the USD/JPY ended the day at 148.166. On Friday, the USD/JPY rose to a high of 148.803 before falling to a session low of 147.834.

The Bank of Japan Ready to Take Center Stage

On Monday, investors will likely look ahead to the Bank of Japan’s monetary policy decision on Tuesday. Recent inflation numbers from Japan reduced bets on the BoJ exiting negative interest rates. The annual inflation rate eased from 2.8% to 2.6% in December, with the core inflation rate softening from 2.5% to 2.3%.

However, wages remain a focal point for the BoJ, eying March wage negotiations to support an H1 2024 pivot from negative rates. A marked rise in wages and a pickup in household spending could drive demand-driven inflation and incentivize a BoJ policy move.

With the BoJ delivering its first policy decision of the year on Tuesday, BoJ chatter warrants investor attention. There are no economic indicators from Japan to garner investor interest.

US CB Leading Index in Focus as Fed Enters Blackout Period

On Monday, the US CB Leading Index needs consideration. Economists forecast the CB Leading Index to fall 0.3% in December after declining by 0.5% in November. A more marked decline could influence bets on a March Fed rate cut. In the November report, the Conference Board forecasted a short and shallow US recession.

Further weakness in housing and labor market indicators could paint a different picture of the US economy. Recent US economic indicators beat forecasts, signaling a resilient US economy.

Last week, better-than-expected US data reduced bets on a March Fed rate cut, sending 10-year US Treasury yields higher. We expect USD/JPY sensitivity to US economic recession signals that could refuel bets on a Q1 Fed rate cut.

According to the CME FedWatch Tool, the probability of a March Fed rate cut fell from 76.9% (Jan-12) to 46.2% (Jan-19).

There are no Fed speakers on the calendar to influence the chances of a March Fed rate cut. The FOMC entered the Blackout period on January 21.

Short-term Forecast

Near-term USD/JPY trends hinge on the Bank of Japan, US services PMIs, and US inflation. A dovish BoJ, pickup in US service sector activity, and sticky US inflation could tilt policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

The USD/JPY held above the 50-day and 200-day EMAs, sending bullish price signals.

A USD/JPY break above the 148.405 resistance level would support a move toward the 150.201 resistance level.

On Monday, the Bank of Japan and US economic indicators need consideration.

However, a drop below the 147.500 handle would give the bears a run at the 146.649 support level. A break below the 146.649 support level would bring the 50-day EMA into play.

The 14-day RSI at 66.01 suggests a USD/JPY return to the 149 handle before entering overbought territory.

4-Hourly Chart

The USD/JPY remained above the 50-day and 200-day EMAs, confirming bullish price trends.

A USD/JPY move through the 148.405 resistance level would give the bulls a run at the 150.201 resistance level.

However, a break below the 147.500 handle would support a fall toward the 50-day EMA and the 146.649 support level. Buying pressure could intensify at the 146.649 support level. The 50-day EMA is confluent with the 146.649 support level.

The 14-period 4-hour RSI at 62.81 suggests a USD/JPY return to the 149 handle before entering overbought territory.