USD/JPY Forecast: Chicago Fed Index in Focus for Rate Hike Clues

Highlights

• USD/JPY gained 0.03% on Friday after a 0.09% loss on Thursday, closing at 149.828.
• BoJ Governor Kazuo Ueda reaffirmed an ultra-loose monetary policy outlook to target inflation.
• The Middle East conflict and the Chicago Fed National Activity Index are focal points on Monday.

Friday Overview of USD/JPY Movements

On Friday, the USD/JPY gained 0.03%. After a 0.09% loss on Thursday, USD/JPY ended the session at 149.828. The USD/JPY rose to a high of 149.992 before falling to a low of 149.611.

Inflation and the Middle East Conflict Flat Lines the USD/JPY

Bank of Japan (BoJ) Governor Kazuo Ueda pressured the Yen on Friday as investors responded to the September inflation figures. Ueda assured the markets the Bank would persevere with an ultra-loose monetary policy stance to bring inflation to target.

The latest guidance contrasted with speculation of a possible move away from negative interest rates. Market expectations of the BoJ raising its inflation forecasts previously fueled bets on a BoJ move away from negative interest rates.

While investors pair bets on a near-term BoJ policy tweak, the Middle East conflict remains a consideration. An escalation in the conflict would fuel a flight to the safety of the Japanese Yen.

There are no economic indicators from Japan for investors to consider. The lack of stats will leave the USD/JPY in the hands of BoJ chatter and updates from the Middle East.

Chicago Fed National Activity Index in Focus

Later today, the Chicago Fed National Activity Index (CFNAI) will garner investor attention. Better-than-expected numbers may support bets on a December Fed rate hike. Economists forecast the CFNAI to increase from -0.16 to 0.05 in September.

Notably, the Index considers 85 monthly US economic indicators, giving investors a bird’s-eye view of the US economy. Beyond the headline figure, employment and consumption figures need consideration.

Tighter labor market conditions and a pickup in consumption would fuel demand-driven inflationary pressures. Demand-driven inflationary pressures may force the Fed to hike rates to curb spending. Higher interest rates can affect borrowing costs and reduce disposable income. A downward trend in disposable incomes may lead to consumers curbing spending on non-essential items.

The USD/JPY may show increased sensitivity to the report. This week’s US economic calendar could dictate the fate of the December Fed interest rate decision. Service Sector PMI (Tues), GDP (Thurs), and Core PCE Price Index (Fri) numbers will influence bets on a Fed rate hike.

Short-term Forecast

The BoJ commitment to an ultra-loose monetary policy stance tilts monetary policy divergence toward the US dollar. While the markets expect the Fed to leave rates unchanged in November, the possibility of a December rate hike lingers. US economic indicators will likely dictate near-term USD/JPY trends, with 150 a significant resistance level.

USD/JPY Price Action

Daily Chart

The USD/JPY sat above the 50-day and 200-day EMAs, affirming bullish price signals. A USD/JPY break above 150 would support a breakout from the 150.293 resistance level to target 151.

News updates from the Middle East and US economic indicators will be focal points on Monday.

An escalation in the Middle East conflict and a weaker-than-expected CFNAI would test the buying appetite for the USD/JPY. A break below the 148.405 support level would give the bears a run at the 50-day EMA.

The 14-day RSI at 60.96 suggests a USD/JPY break above the 150.293 resistance level before entering overbought territory.

4-Hourly Chart

The USD/JPY hovers above the 50-day and 200-day EMAs, reaffirming bullish price signals. A move through to 150 would give the bulls a run at the 150.293 resistance level and 151.

However, a break below the 50-day EMA would support a move to the 200-day EMA and the 148.405 support level. Buying pressure will likely intensify at 148.400. The 200-day EMA is confluent with the 148.405 resistance level.

The 57.03 14-4 Hourly RSI suggests a USD/JPY break above the 150.293 resistance level before entering overbought territory.