USD/JPY Forecast: The BoJ, US Consumer Confidence, and 158 in Focus

Inflation, the Bank of Japan, and the Japanese Yen

The Bank of Japan and the USD/JPY will remain in focus on Tuesday (May 28). Views on the timing of an interest rate hike need consideration. On Monday (May 27), BoJ Governor Kazuo Ueda said the Bank made progress on moving away from zero and raising inflation expectations. Nevertheless, the BoJ Governor said there would be a cautious approach towards achieving the 2% target.

The weaker Yen could create further uncertainties after the larger-than-expected contraction in the Japanese economy in Q1 2024.

Private consumption accounts for circa 60% of the Japanese economy. The weaker Yen pushes import costs higher, impacting prices for goods and household spending. Continued weakness in household spending could leave the Bank of Japan in a holding pattern and the USD/JPY in the hands of the Fed.

On Friday (May 31), economic indicators from Japan will give investors a snapshot of the macroeconomic environment in early Q2 2024. Inflation, unemployment, retail sales, and industrial production numbers will warrant investor attention. Softer inflation numbers and a pullback in retail could close the door further on a 2024 BoJ rate hike.

US Economic Calendar: Consumer Confidence and Fed Speeches

Later in the Tuesday session, US consumer confidence will be in focus. A pullback in consumer confidence could signal a weakening consumption environment. Downward trends in consumer spending could dampen demand-driven inflation and allow the Fed to cut interest rates.

Economists forecast the CB Consumer Confidence Index to fall from 97.0 to 95.9. An unexpected slide below 90.0 could spook investors. A sharp fall in consumer confidence could reignite fears of a hard landing.

Other stats include housing and manufacturing sector data. However, the focus will likely be on consumer confidence before the all-important US Personal Income and Outlays Report (May 31).

Furthermore, FOMC member speeches also need consideration. FOMC members Loretta Mester, Neel Kashkari, and Lisa Cook are on the calendar to speak on Tuesday. Reaction to the recent service sector PMI and labor market data could move the dial.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on inflation numbers from Japan and the US. Softer numbers from Japan and sticky US inflation could tilt monetary policy divergence toward the US dollar. However, a USD/JPY move beyond 158 could raise intervention risks.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered well above the 50-day and 200-day EMAs, sending bullish price signals.

A USD/JPY return to the 158 handle could give the bulls a run at the April 29 high of 160.209.

Central bank chatter and US consumer confidence numbers need consideration.

Conversely, a USD/JPY drop below the 156 handle could signal a fall to the 50-day EMA. A fall through the 50-day EMA could give the bears a run at the 151.685 support level.

The 14-day RSI at 60.60 indicates a USD/JPY move to the April 29 high of 160.209 before entering overbought territory.