USD/JPY Forecast: BoJ’s Dilemma on Softer Retail Sales and US Inflation in the Spotlight

Highlights

• The USD/JPY declined by 0.16% on Wednesday, ending the session at 147.238.
• On Thursday, consumer confidence, retail sales, and industrial production numbers from Japan and the Bank of Japan will be in focus.
• US inflation numbers for October will also move the dial.

USD/JPY Movements on Wednesday

The USD/JPY declined by 0.16% on Wednesday. After a 0.81% slide on Tuesday, the USD/JPY ended the day at 147.238. The USD/JPY fell to a low of 146.671 before rising to a Wednesday high of 147.905.

The Bank of Japan and Japanese Consumers in Focus

On Thursday, the Japanese economy is in the spotlight. Retail sales and industrial production numbers drew investor interest early today.

Mixed signals from Bank of Japan Board members continue to fuel uncertainty about the timing of a BoJ exit from negative rates. Wage growth and demand-driven inflation are two considerations for the BoJ. A pickup in consumption could expedite a BoJ pivot from ultra-loose monetary policy.

However, retail sales increased by 4.2% in October year-over-year vs. 6.2% in September. Economists forecast retail sales to rise by 5.9%. Industrial production numbers beat forecasts, up 1.0% (Sep: +0.5%). Economists forecast production to increase by 0.8%.

Later this morning, consumer confidence figures also warrant consideration. Improving consumer confidence could signal a pickup in consumer spending and demand-driven inflation. The combination would support bets on a BoJ exit from negative rates in Q1 2024.

However, Bank of Japan commentary needs monitoring. BoJ Board Member Nakamura is on the calendar to speak. Views on negative interest rates and considerations to pivot from ultra-loose monetary policy will influence buyer appetite for the Yen.

US Inflation in the Spotlight

On Thursday, US inflation will be the focal point. Recent Fed speeches have placed a greater focus on the inflation numbers. Softer-than-expected inflation could fuel bets on an H1 2024 Fed rate cut.

However, sticky inflation may support bets on a higher-for-longer Fed rate trajectory. The US economy remained robust in Q3, expanding by 5.2%.

Economists forecast the Core PCE Price Index to increase 3.5% in October year-over-year. In September, the Index was up 3.7%.

While inflation is the focal point, personal spending and income numbers also need consideration. Better-than-expected numbers could signal an upward trend in consumer spending. A positive consumer spending outlook could fuel demand-driven inflation and force the Fed to maintain a hawkish rate path.

Beyond the numbers, Fed speakers need monitoring. Fed Vice Chair John Williams is on the calendar to speak. Reaction to the inflation numbers would warrant investor attention.

Short-term Forecast

Near-term trends for the USD/JPY hinge on the US inflation numbers. While the BoJ has signaled intent to exit negative rates, the timing remains uncertain. Softer US inflation numbers could support bets on an H1 2024 Fed rate cut, tilting policy divergence toward the Yen.

USD/JPY Price Action

Daily Chart

The USD/JPY sat below the 50-day EMA while remaining above the 200-day, affirming bearish near-term but bullish longer-term price signals.

A USD/JPY return to 148 would support a move to the 148.405 resistance level and the 50-day EMA.

Bank of Japan board member commentary and the US inflation are the focal points.

However, a break below the 146.649 support level and trend line could signal a drop below the 146 handle.

The 14-day RSI at 35.46 suggests a USD/JPY fall to the 146.649 support level before entering oversold territory.

4-Hourly Chart

The USD/JPY held below the 50-day and 200-day EMAs, reaffirming near-term bearish price signals.

A USD/JPY return to 148 would give the bulls a run at the 148.405 resistance level and the 50-day EMA.

However, a fall through the 146.649 support level would bring the trend line and sub-146 into play.

The 14-period 4-hour RSI at 33.36 suggests a USD/JPY fall to the 146.649 support level before entering oversold territory.