USD/JPY Forecast: U.S. Reports on Inflation, Consumer Sentiment Could Impact Fed Policy

USD/JPY Highlights

• Strong job market boosted U.S. Treasury yields
• USD/JPY exchange rate closed lower for the week
• Upcoming U.S. reports could impact Fed policy and exchange rate

USD/JPY Overview

On Friday, the USD/JPY exchange rate jumped after U.S. employers added more jobs than expected in April, with wages also growing more than anticipated. The unemployment rate also fell to 3.4%, lower than forecast.

The USD/JPY settled at 134.846, up 0.567 or +0.42%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) finished at $69.11, down $0.30 or -0.43%.

Job Report Boosts US Yields

This news caused U.S. Treasury yields to rise due to a strong job market, which made it less likely for the Federal Reserve to halt its tightening campaign. The central bank had just announced a 25 basis point interest rate hike on Wednesday and indicated that rate increases may be paused soon. However, investors remained cautious about future Fed policy and the possibility of rate cuts later in the year due to recession fears.

USD/JPY Posts Weekly Loss Despite Friday’s Positive News

Despite the positive news on Friday, the USD/JPY exchange rate closed lower for the week after hitting its highest level since March 8 earlier in the week. This was due to sellers hitting the Forex pair hard after Wednesday’s Fed meeting suggested a pause in Fed rate hikes. Additionally, Fed funds futures are pricing in around 75 basis points of cuts by year-end.

Upcoming Reports to Impact Fed Policy, USD/JPY

Next week, three key U.S. reports could have an impact on Fed policy and set the tone for the USD/JPY exchange rate: Wednesday’s consumer price index, Thursday’s producer price index, and Friday’s consumer sentiment report. Meanwhile, investors will continue to monitor the U.S. Debt Ceiling standoff, which is becoming a major issue in Washington. However, after Friday’s recovery in the regional banking sector, this problem is expected to fade away from the headlines.

April Jobs Report Boosts USD/JPY Short-Term Outlook

Based on the strong April jobs report and lower-than-expected unemployment rate, Forex traders may be bullish on the USD/JPY exchange rate in the short-term. However, there is still caution among investors regarding the possibility of future Fed rate cuts and how this may impact the exchange rate.

Although the USD/JPY exchange rate saw a slight decline during the week, traders could consider buying the pair if upcoming U.S. reports on consumer and producer prices and consumer sentiment indicate higher than expected inflation. Such results may discourage investors from expecting any Fed rate cuts later in the year. It is also advisable for Forex traders to monitor the U.S. Debt Ceiling situation as it has the potential to impact the USD/JPY exchange rate.

Technical Analysis

Currently, the USD/JPY is straddling its pivot at $134.518, which indicates a mixed scenario from a daily technical perspective. Although the price action suggests that the main trend is still upward, the short-term momentum is trending lower. The near-term direction of the Dollar/Yen will depend on how traders react to the pivot.

Buyers may return if the pivot is tested since the main trend is upward. If this move generates enough upside momentum, the USD/JPY could retest last week’s high at $137.913, followed by resistance (R1) at $138.452.

On the other hand, a failure to hold the pivot at $134.518 could indicate weakness. If this leads to enough downside momentum, selling may possibly extend into the nearest support (S1) at $132.471.