USD/JPY Forecast: The Bank of Japan Puts the Yen in the Spotlight

Highlights

• The USD/JPY slipped by 0.05% on Monday, ending the session at 148.085.
• On Tuesday, the Bank of Japan will deliver its first monetary policy decision, with discussions about negative rates as the focal point.
• Later in the session, the US economic calendar also needs consideration.

USD/JPY Movement on Monday

The USD/JPY slipped by 0.05% on Monday. Reversing a 0.01% gain from Friday, the USD/JPY ended the day at 148.085. On Monday, the USD/JPY rose to a high of 148.301 before falling to a session low of 147.613.

The Bank of Japan Takes Center Stage

On Tuesday, the Bank of Japan will be in the spotlight. Easing inflationary pressures reduced bets on a pivot from negative rates. However, expectations of a marked increase in wages leave an element of uncertainty before the BoJ policy decision and press conference.

Economists expect the Bank of Japan to leave interest rates unchanged at negative 0.1%. Tweaks to the yield curve control policy would move the dial. However, forward guidance on the economic outlook, inflation, and interest rate goals would garner more investor interest.

Support for a post-March pivot from negative rates would drive buyer demand for the Japanese Yen. The outcome of wage negotiations in March could ultimately decide the Bank of Japan’s interest rate decisions through H1 2024.

A marked increase in wages would increase disposable income. Upward trends in disposable income could fuel household spending and demand-driven inflation. Demand-driven inflation has been the missing piece of the jigsaw for a BoJ pivot from negative rates.

The US Economic Calendar: Richmond Private Sector Indexes in Focus

On Tuesday, Richmond private sector Indexes for January warrant investor interest. Preliminary US private sector PMIs are out on Wednesday. We expect increased sensitivity to the Richmond Index numbers. A pickup in private sector activity could further reduce bets on a March Fed rate cut. However, investors must consider sub-components, including prices and employment.

Investors can consider the Indexes as a leading indicator for the US PMIs. The Survey of Fifth District private sector activity includes survey results from firms in the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and the majority of Western Virginia.

Economists forecast the Richmond Fed Services PMI to decline from 0 to -5 and the Manufacturing PMI to fall from -11 to -15.

No Fed speakers are speaking on Tuesday to influence the chances of a March Fed rate cut. The FOMC entered the Blackout period on January 21.

Short-term Forecast

Near-term USD/JPY trends hinge on the Bank of Japan, US private sector PMIs, and US inflation. A dovish BoJ, better-than-expected US service sector activity, and sticky US inflation could drive demand for the USD/JPY.

USD/JPY Price Action

Daily Chart

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

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

On Tuesday, the Bank of Japan monetary policy decision and US economic indicators need consideration.

However, a fall through the 147.500 handle would bring the 146.649 support level into play. A drop below the 146.649 support level would give the bears a run at the 50-day EMA.

The 14-day RSI at 65.26 indicates a USD/JPY return to the 149 handle before entering overbought territory.

4-Hourly Chart

The USD/JPY held 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 drop below the 147.500 handle would bring the 50-day EMA and the 146.649 support level into play.

The 14-period 4-hour RSI at 57.93 indicates a USD/JPY move to the 149 handle before entering overbought territory.