USD/JPY Forecast: Japan Inflation Softens to 2.6% Easing Pressure on the BoJ

Highlights

• The USD/JPY ended the Thursday session flat at 148.144.
• On Friday, inflation numbers from Japan garnered investor interest early in the session.
• Later, Michigan Consumer Sentiment and Fed speakers warrant investor attention.

USD/JPY Movement on Thursday

The USD/JPY ended the Thursday session flat at 148.144. On Thursday, the USD/JPY fell to a low of 147.654 before rising to a session high of 148.300.

Inflation and the Bank of Japan in the Spotlight

On Friday, inflation numbers from Japan garnered investor interest. Recent inflation, wage growth, and household consumption figures reduced bets on a Bank of Japan pivot. Softer inflation numbers could further impact Bank of Japan plans to exit negative rates.

Annual inflation softened from 2.8% to 2.6% in December. Economists forecast an inflation rate of 2.6%. The core inflation rate declined from 2.5% to 2.3%. Economists predicted a core inflation rate of 2.3%.

The softer inflation figures would likely ease pressure on the BoJ to exit negative rates in Q1. However, wage growth negotiations in March could incentivize the BoJ to pivot negative rates in Q2.

Investors must monitor Bank of Japan board member reactions to the inflation numbers. Comments relating to the timing of a pivot from negative rates need consideration.

US Michigan Consumer Sentiment and Fed Speakers in the Spotlight

On Friday, US consumer sentiment will draw investor interest. Upward trends in consumer sentiment could signal a pickup in consumer spending. Improving consumer spending trends could fuel demand-driven inflation. A pickup in inflationary pressure could force the Fed to delay interest rate cuts to curb consumer spending and dampen demand-driven inflation.

A higher-for-longer interest rate path impacts borrowing costs and reduces disposable income. Downward trends in disposable income could affect consumer spending.

Economists forecast the Michigan Consumer Sentiment Index to increase from 69.7 to 70.0 in January. However, investors must consider sub-components, including inflation expectations.

Other stats include existing home sales figures for December. However, the numbers will likely play second fiddle to the Michigan report.

Beyond the numbers, FOMC member commentary needs consideration. FOMC members Michael Barr and Mary Daly are on the calendar to speak on Friday.

Short-term Forecast

Near-term USD/JPY trends hinge on Bank of Japan forward guidance, Fed chatter, and US consumer sentiment. A pickup in consumer sentiment and easing bets on a March Fed rate cut could tilt policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

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

A USD/JPY breakout from the 148.405 resistance level would give the bulls a run at the 150.201 resistance level.

On Friday, inflation numbers from Japan, US consumer confidence, and central bank chatter need consideration.

However, a break below the 147.500 handle would support a fall toward the 146.649 support level. A fall through the 146.649 support level would bring the 50-day EMA into play.

The 14-day RSI at 65.57 indicates a USD/JPY move through the 148.405 resistance level before entering overbought territory.

4-Hourly Chart

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

A USD/JPY break above the 148.405 resistance level would support a move toward the 150.201 resistance level.

However, a fall through the 147.500 handle would give the bears a run at the 146.649 support level.

The 14-period 4-hour RSI at 70.24 shows the USD/JPY in overbought territory. Selling pressure may intensify at the 148.405 resistance level.