USD/JPY Forecast: Price Tug-of-War – U.S. Inflation vs. Japanese Yen Support Signals

Highlights

• USD/JPY recovered: The currency pair rebounded, registering a 0.33% gain on Friday, closing at 147.777.
• US CPI Report: Expected US annual inflation rate jump from 3.2% to 3.6%.
• Fed Rate Implications: Rising inflation could back a hawkish Fed interest rate stance.

Friday Overview

The USD/JPY gained 0.33% on Friday. Reversing a 0.25% loss from Thursday, the USD/JPY ended the day at 147.777. The USD/JPY fell to a low of 146.584 before striking a high of 147.870.

Machine Tool Orders and Intervention Warnings

Machine tool orders from Japan will draw interest this afternoon. Following the disappointing household spending and Q2 GDP numbers, improving orders would provide support.

Economists forecast machine tool orders to decline by 17.0% year-over-year in August, compared to a decline of 19.8% in July. While the numbers will give investors a view of the demand environment, we don’t expect the figures to influence BoJ monetary policy goals. Wage growth and consumer demand remain the focal points for BoJ Governor Ueda and Board members.

Beyond the economic calendar, the upside for the USD/JPY will remain limited. The Japanese government issued more warnings of intervention, leaving the USD/JPY at risk of a sharp decline from government intervention moves.

US Inflation Returns to Center Stage

The US Consumer Inflation Expectations survey will move the dial this afternoon. An unexpected rise in inflation expectations would support the more hawkish Fed interest rate outlook. Economists forecast inflation expectations to soften from 3.5% to 3.4%.

While softer numbers would ease bets on a final Fed rate hike, the US CPI Report will have the final say mid-week. Economists expect the US annual inflation rate to accelerate from 3.2% to 3.6%, supporting bets on further Fed rate hikes.

Higher interest rates force businesses to reduce employment levels to manage profit margins. Weaker labor market conditions impact consumer confidence and wage growth. Softer wage growth reduces disposable income levels. Lower consumer confidence, labor market uncertainty, and reduced disposable income weigh on spending and demand-driven inflation.

Short-term Forecast

Economic and monetary policy divergence remains firmly in favor of the dollar. However, government warnings of intervention to support the Yen continue to test the USD/JPY at the 147 handle. Later today, US inflation numbers will influence the USD/JPY trends before the US CPI Report on Wednesday.

USD/JPY Price Action

Daily Chart

The USD/JPY remained above the 146.649 support level and the 50-day and 200-day EMAs, sending bullish price signals. While the macroeconomic backdrop favors the dollar, Japanese government warnings of intervention to support the Yen remain a headwind. A fall through the 146.649 support level would bring the 144.894 support level and 50-day EMA into play.

However, hotter-than-expected US consumer inflation expectation numbers would give the bulls a run at the 148.405 resistance level.

The 59.99 14-Daily RSI signals more gains for the USD/JPY before entering overbought territory.

4-Hourly Chart

The USD/JPY remains above the 50-day and 200-day EMAs and the 146.649 support level. The 50-day EMA rejected a USD/JPY fall, with the USD/JPY testing the 146.649 support level this morning.

Avoiding another fall through the 50-day EMA would bring the 148.405 resistance level into play. However, US consumer inflation expectation figures need consideration this afternoon. An unexpected pickup in inflation expectations would give the bulls a run at the 148.405 resistance level.

The 48.34 14-4H RSI reading indicates more downside for the USD/JPY, with sub-146 in play before entering oversold territory.