USD/JPY Forecast: Yen’s Path Clouded by Fed Speculation and BoJ Rate Talk

Uncertainty About the Bank of Japan Rate Path

The path for the USD/JPY has become more uncertain following the Q1 GDP numbers from Japan. In Q1 2024, the Japanese economy contracted by 0.5% after stalling in Q4 2023. Private consumption contributed to the contraction, tempering investor expectations of a near-term Bank of Japan interest rate hike.

Nevertheless, the private consumption and GDP numbers were unlikely to reflect the effects of the March wage hikes on disposable income and household spending.

Former Bank of Japan Chief Economist Toshitaka Sekine reportedly signaled a summer interest rate hike. According to Bloomberg, Sekine said,

“It may sound extreme, but it’s fine if it takes place in June. There’s no need to conclude that there won’t be one.’

The hawkish sentiment may not be enough to fuel buyer demand for the Japanese Yen. Service sector activity picked up in April, a focal point for the Bank of Japan. However, household spending remains a concern. The wage hikes in March may need to translate into private consumption and demand-driven inflation for the BoJ to begin discussions about interest rate hikes in earnest.

Japan has no economic indicators to consider on Friday (May 17). However, investors should monitor Bank of Japan views on inflation, the economy, and interest rates.

US Economic Calendar: FOMC Member Commentary

Later in the Friday session, investors should consider FOMC member speeches. April inflation numbers signaled a softer inflation environment. Nevertheless, inflation remained elevated at 3.4%.

On Thursday, FOMC members Loretta Mester and Raphael Bostic suggested a higher-for-longer Fed rate path.

FOMC member Christopher Waller is on the calendar to speak on Friday (May 17). A similar stance could temper investor expectations of a September Fed rate cut. In a recent speech, Christopher Waller said there was no rush to cut interest rates. Waller spoke before the US Jobs Report and inflation numbers. A change in stance warrants investor attention.

While inflationary pressures eased, the US labor market remains tight. Tight labor market conditions could support wage growth and increase disposable income. Upward trends in disposable income could fuel consumer spending and demand-driven inflation.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on central bank chatter. Calls for a higher-for-longer Fed rate path could tilt monetary policy divergence toward the US dollar. Economic indicators from Japan need to signal a shift in momentum for investors to consider the possibility of a BoJ policy move.

USD/JPY Price Action

Daily Chart

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

A USD/JPY break above the 156 handle may give the bulls a run at the 158 handle. If the USD/JPY returns to 158, the April 29 high of 160.209 could become the next price target.

On Friday, Bank of Japan and FOMC member commentary need consideration.

Alternatively, a USD/JPY break below the 50-day EMA could give the bears a run at the 151.685 support level.

The 14-day RSI at 54.20 indicates a USD/JPY move to the April 29 high of 160.209 before entering overbought territory.