USD/JPY Forecast: Higher on Strong US Jobs Data, Potential Fed Rate Hike in May

Highlights

• US nonfarm payrolls increase by 236k in March
• Fed expected to maintain message of higher interest rates
• USD/JPY likely to remain volatile due to economic risks

Overview

The Dollar/Yen rose on Friday as U.S. Treasury yields climbed after employment data for March indicated the labor market remains tight, but was largely in line with market expectations. Nonetheless, the data suggests that the Federal Reserve may have to raise interest rates next month.

On Friday, the USD/JPY settled at 132.164, up 0.376 or +0.29%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $70.68, down $0.31 or -0.44%.

US Nonfarm Payrolls Rise by 236k in March; Unemployment Rate Drops to 3.5%

The U.S. nonfarm payrolls increased by 236,000 in March, which was close to the expected number of 239,000. Additionally, the February data was revised upwards to show 326,000 jobs were added instead of the previously reported 311,000.The unemployment rate also decreased from 3.6% to 3.5% in February. Moreover, the average hourly earnings, which indicate wage inflation, increased by 0.3% in March after rising 0.2% in February.

Fed Expected to Maintain Message of Higher Interest Rates

Federal Reserve officials are expected to maintain their message of keeping interest rates higher for a longer period leading up to the May policy meeting, which may strengthen the US dollar.

However, recent economic data indicates that there may be increased negative economic risks. If upcoming inflation and retail sales data disappoint, it could affect these expectations.

Before the release of the jobs report, the market had predicted that the Federal Reserve would not make any changes at the May policy meeting. However, after the report, the market now expects a 70% chance of a 25 basis point interest rate hike. Despite this, the market also factors in multiple rate cuts by the end of the year.

Volatility Likely as Economic Risks Persist

Overall, the USD/JPY is likely to remain volatile in the coming weeks, with the potential for additional gains as the Federal Reserve maintains its message of higher interest rates.

However, there is also the possibility of downside risks if upcoming economic data (next week’s Consumer Price Index report (CPI)) fails to meet market expectations. Investors should monitor the market closely for any developments that could impact the USD/JPY.