USD/JPY Forecast: Services PMIs to Impact BoJ and Fed Rate Hike Bets

The Services PMI and the Bank of Japan

Preliminary private sector PMI numbers for May will put the USD/JPY in focus.

Economists forecast the Jibun Bank Manufacturing PMI to rise from 49.6 to 49.7 in May. Moreover, economists expect the Jibun Bank Services PMI to fall from 54.3 to 53.8.

The Jibun Bank Services PMI will likely impact buyer demand for the Japanese Yen. Following the Spring wage hikes, the BoJ hopes the services sector can fuel demand-driven inflation and allow for a higher interest rate environment. Furthermore, the services sector contributes over 60% to the Japanese economy.

However, investors must consider the sub-components, including input prices, employment, and new orders.

Beyond the numbers, investors should monitor for Bank of Japan commentary. Views on inflation, the economic outlook, and the timing for an interest rate hike could move the dial. Yen weakness continues to leave the BoJ under pressure to fuel expectations of a summer rate hike.

US Economic Calendar: The Services Sector, the Labor Market, and the Fed

Later in the Thursday session, US jobless claims data and preliminary private sector PMIs warrant investor attention.

Economists forecast initial jobless claims to fall from 222k to 220k in the week ending May 18. Tighter labor market conditions could support wage growth and increase disposable income. Upward trends in disposable income may fuel consumer spending and demand-driven inflation. Moreover, tighter labor market conditions could leave a Fed interest rate hike on the table.

However, the S&P Global Services PMI could impact the Fed rate path more. The services sector contributes over 70% to the US economy, with housing services inflation a focal point.

Economists forecast the S&P Global Services PMI to remain unchanged at 51.3. Better-than-expected figures may fuel speculation about a Fed rate hike. However, investors should consider the sub-components, including prices and employment.

Investors should also track FOMC member reaction to the stats after the more hawkish-than-expected FOMC Meeting Minutes.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the Services PMIs and views on monetary policy. Better-than-expected US PMI numbers could raise investor bets on a Fed interest rate hike and tilt monetary policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

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

A USD/JPY breakout from the 157 handle would support a move to the 158 handle. A return to the 158 handle could give the bulls a run at the April 29 high of 160.209.

On Thursday (May 22), Services PMIs and US labor market data need consideration.

Alternatively, a USD/JPY fall through the 155 handle could give the bears a run at the 50-day EMA. A break below the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 59.57 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.