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USD/JPY Forecast: Softer as Weak US Services Data Casts Shadow on Fed Meeting

By:
James Hyerczyk
Updated: Jun 6, 2023, 06:58 GMT+00:00

US services sector weakness raises rate outlook concerns, weakening USD/JPY. Traders cautious ahead of FOMC as policy uncertainty looms.

USD/JPY

Highlights

  • Weak U.S. services data prompts retreat in USD/JPY.
  • Uncertainty looms over Federal Reserve’s upcoming meeting.
  • Traders cautious as interest rate outlook becomes uncertain.

Overview

The USD/JPY is experiencing a retreat early Tuesday, driven by unexpectedly weak U.S. services data. This development has solidified expectations for a pause in the Federal Reserve’s upcoming meeting, but it has also cast a shadow over the policy outlook for the months ahead.

Rate Volatility Worries

Recent data and statements from Fed officials regarding U.S. rates have been a focal point for global investors, resulting in some volatility in the U.S. dollar. Following Friday’s surge fueled by a strong U.S. jobs report, the Dollar/Yen pair has been pushed back due to suggestions from Fed officials that a rate hike in June may be skipped. However, the lackluster outcome in the services sector overnight has once again clouded the outlook for interest rates.

Services PMI Raises Concerns

The unexpected softness in the ISM services PMI has raised eyebrows. According to a survey conducted by the Institute for Supply Management, the U.S. services sector barely expanded in May, with new orders slowing down. This resulted in a three-year low for a measure of prices paid by businesses for inputs, which could support the Fed’s efforts to combat inflation.

Dollar Weakens Amid Data

Following weaker U.S. services sector data on Monday, the dollar slightly weakened against the Japanese yen as the yield on 10-year Treasuries declined. The Japanese yen tends to strengthen when interest rates are lower, as it reduces the yield spread between U.S. and Japanese government bonds. However, the ever-changing narrative regarding the terminal rate and the timeline for rate cuts could pose challenges for the upside potential of the USD/JPY pair until greater clarity is provided.

FOMC Meeting Caution

With no major U.S. data scheduled for the remainder of the week and Fed officials currently in a “blackout” period, it appears that the Dollar/Yen pair is in a holding pattern ahead of the Federal Open Market Committee (FOMC) meeting. This cautious approach is understandable, as uncertainty surrounding the policy decision may discourage traders from increasing their positions.

Rate Expectations Fluctuate

The Fed’s data-dependent stance means that rate expectations could continue to experience significant fluctuations, given their high sensitivity to incoming economic data. Traders should keep an eye on the release of the U.S. May Consumer Price Index (CPI) report next week, as it will provide further insights into the inflationary pressures and the potential course of action for the Federal Reserve.

Short-Term Outlook: Neutral Ahead of CPI

The retreat of the USD/JPY is being driven by weak U.S. services data. This weak data has prompted expectations for a pause in the upcoming Federal Reserve meeting. The softness in the services sector has raised concerns about the interest rate outlook. As a result, there has been some weakening of the U.S. dollar against the Japanese yen.

Traders are adopting a cautious approach ahead of the Federal Open Market Committee (FOMC) meeting due to the looming uncertainty. The Fed’s data-dependent stance and the upcoming release of the U.S. Consumer Price Index (CPI) report will be crucial factors to watch for potential future movements in the USD/JPY.

Technical Analysis

Daily USD/JPY

The USD/JPY is currently trading between 142.216 (R1) and 137.859 (PIVOT). The mid-point of this range is 140.038. The Forex pair is currently straddling this level, which suggests neutral momentum.

Since the main trend is up, buyers are likely to come in on a test of 137.859 (PIVOT) if they are looking for value. However, if it fails then look out to the downside. This could trigger a near-term acceleration into 134.783 (S1).

If the pivot holds and the upside momentum increases, then we’re going to assume that buyers are chasing the USD/JPY. This could create the upside momentum needed to challenge 142.216 (R1). Look for counter-trend sellers on the first test of this level.

Resistance & Support Levels

PIVOT – 137.859 R1 – 142.216
S1 – 134.783 R2 – 145.292
S2 – 130.425 R3 – 149.650

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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