USD/JPY Forecast: Bulls Eye 151 on US Inflation and Fed Chatter

Highlights

• The USD/JPY rallied 0.96% on Tuesday, ending the session at 150.771.
• US inflation numbers for January sent the USD/JPY back toward the intervention zone.
• On Wednesday, the Bank of Japan and Fed commentary need consideration.

USD/JPY Movement on Tuesday

The USD/JPY rallied 0.96% on Tuesday. Following a 0.07% gain on Monday, the USD/JPY ended the day at 150.771. The USD/JPY fell to a low of 149.232 before rising to 150.884.

Interventions and the Bank of Japan

In late December 2023, the USD/JPY retreated to a Q4 low of 140.249. A robust US economy and US inflation overshadowed the market bets on a Bank of Japan pivot from negative rates.

However, the Bank of Japan contributed to the USD/JPY return to 150. Recently, the Bank of Japan has sent mixed signals on the timelines for a pivot from negative rates. More significantly, the BoJ poured cold water over market expectations of a hawkish BoJ rate path.

In February, the Bank of Japan Deputy Governor Shinichi Uchida alerted investors conditions are becoming ripe for a pivot from negative rates. However, the Deputy Governor also warned interest rates would not rise rapidly after an exit from negative rates. The warning impacted buyer demand for the Yen.

Wage growth, household spending, and the services sector are focal points for the BoJ. Economists expect the spring wage growth negotiations to deliver a BoJ pivot. The Bank of Japan needs a pickup in demand-driven inflationary pressures to restore price stability. However, the BoJ interest rate path remains uncertain. Economic indicators and BoJ forward guidance must align to support a USD/JPY return to 140.

Another consideration is the threat of an intervention to bolster the Yen.

There are no economic indicators from Japan to consider on Wednesday. However, Bank of Japan commentary needs consideration before Q4 GDP and industrial production numbers (Thurs).

The Post-US CPI Report Fed Effect

On Wednesday, the market focus will turn to FOMC member speeches. The hotter-than-expected US CPI Report sank bets on H1 2024 Fed rate cuts.

According to the CME FedWatch Tool, the probability of a March Fed rate cut fell from 16.0% to 8.5%. The chances of a 25-basis point May Fed rate cut briefly declined from 52.2% to 35.2%.

Hawkish Fed commentary supporting a more patient stance on interest rates could deliver more USD/JPY gains.

FOMC member Austan Goolsbee is on the calendar to speak on Wednesday. The USD/JPY could show increased sensitivity to Fed commentary. Investors were optimistic about an H1 2024 Fed rate cut before the US CPI Report. Investor optimism lingered despite FOMC members calling for patience on rate cuts.

Short-term Forecast

Near-term trends for the USD/JPY hinge on Fed chatter and Bank of Japan guidance about an April pivot from negative rates. However, a more hawkish than expected Fed rate path may continue to drive buyer demand for the USD/JPY.

USD/JPY Price Action

Daily Chart

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

A USD/JPY move to the 151 handle would bring the 151.889 resistance level resistance level into play.

On Wednesday, the Bank of Japan and Fed commentary need consideration.

However, a fall through the 150.201 support level would give the bears a run at the 148.405 support level.

The 14-day RSI at 69.08 suggests a USD/JPY return to the 151 handle before entering overbought territory.

4-Hourly Chart

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

A USD/JPY return to the 151 handle would support a move to the 151.889 resistance level.

However, a break below the 150.201 support level would bring the 50-day EMA and the 148.405 support level into play.

The 14-period 4-hour RSI at 82.01 shows the USD/JPY in overbought territory. Selling pressure could intensify at the 151 handle.