USD/JPY Forecast: Bank of Japan Talks Yen, Fed Rate Cuts Bets Fall

The Bank of Japan and the Leading Economic Index

On Monday (May 27), Bank of Japan commentary will the USD/JPY in focus.

Bank of Japan Governor Kazuo Ueda and Deputy Governor Shinichi Uchida are on the calendar to speak.

Economic indicators from Friday showed Japanese inflation softened in April. The annual core inflation rate fell from 2.6% to 2.2%, leaving the Bank of Japan in a holding pattern. However, the weaker Japanese Yen has fueled investor expectations of a 2024 Bank of Japan interest rate hike.

The weaker Yen pushes import costs higher, impacting consumer prices, household spending, and the economy. A tighter monetary policy environment could drive buyer appetite for the Yen and ease import cost pressures.

Comments relating to the Japanese Yen, inflation, the economy, and monetary policy could move the dial.

On Thursday (May 23), the Bank of Japan Governor reportedly stated that the US economy was the main risk. Failure to achieve a soft landing would adversely affect the global and Japanese economies. However, Governor Ueda also expected the Japanese economy to recover, supporting investor bets on a 2024 interest rate hike.

Later in the morning session, Leading Economic Index numbers from Japan also need consideration. According to the preliminary report, the Index fell from 112.1 to 111.4 in March, aligning with the larger-than-expected economic contraction in Q1 2024.

A downward revision could test buyer demand for the Japanese Yen. The Leading Economic Index considers 12 economic indicators to predict the economic outlook.

US Economic Calendar: FOMC Members and Fed Rate Cut Bets

Later in the Monday session, investors should track comments from Fed speakers. Comments relating to inflation, the economic outlook, and interest rates warrant investor attention.

Last week, the FOMC Meeting Minutes, labor market data, and the US Services PMI reduced investor expectations of a September Fed rate cut.

Michigan Inflation Expectations numbers provided brief relief. Nevertheless, Michigan Inflation Expectations increased from 3.2% to 3.3% in May, well above the 2% target.

The CME FedWatch Tool reflected the effects of the Fed Minutes and economic indicators on investor expectations of a September rate cut. In the week ending May 24, the chances of the Fed leaving interest rates unchanged increased from 35.2% to 50.2%.

On Friday (May 31), the US Personal Income and Outlays Report could change the narrative. Softer inflation numbers and a pullback in personal income/spending could refuel investor bets on a September Fed rate cut.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on central bank chatter and inflation numbers from Japan and the US. Amidst falling bets on a Fed September rate cut, US inflation numbers on Friday will influence the Fed rate path and the USD/JPY.

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 157.5 handle could support a move toward the April 29 high of 160.209.

On Monday (May 27), Bank of Japan and Fed commentary need consideration.

Conversely, a USD/JPY fall through the 155 handle could give the bears a run at the 50-day EMA. A break below the 50-day EMA would bring the 151.685 support level into play.

The 14-day RSI at 60.77 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.