USD/JPY Weekly Forecast: Services PMIs, Inflation, and Central Bankers in Focus

Weekly Overview of the USD/JPY in the Week Ending May 17, 2024

The USD/JPY slipped by 0.07% in the week ending May 17, ending the week at 155.640. The USD/JPY rose to a Tuesday (May 14) high of 156.786 before sliding to a Thursday (May 16) low of 153.601.

USD/JPY Analysis: Trade, Services, and Inflation in Focus

On Monday (May 20), Tertiary Industry Index numbers for March may influence buyer appetite for the USD/JPY. However, the numbers will unlikely affect the Bank of Japan interest rate trajectory.

Economists forecast the Tertiary Industry Index to increase by 0.1% in March after rising by 1.5% in February.

On Wednesday (May 22), the Reuters Tankan Index, trade data, and machinery orders warrant investor attention.

A larger-than-expected fall in the Tankan Index could reduce investor bets on a BoJ interest rate hike. Economists forecast the Index to fall from 9 to 7 in May. The Index highlights sentiment toward business conditions across the manufacturing and non-manufacturing sectors.

Trade data may also impact investor sentiment toward the BoJ rate path. A pickup in demand could signal an improving macroeconomic environment. Economists forecast exports to rise 11.1% year-on-year in April after increasing 7.3% in March. Furthermore, economists expect imports to advance 9.0% after falling 4.9% in March.

However, investors could ignore machinery orders for March, with the Q1 GDP numbers already painting a grim picture of the first quarter.

Services PMI and Inflation Numbers Pivotal for the BoJ

Preliminary private sector PMI numbers for May will be in focus on Thursday (May 23). The Services PMI will likely impact the USD/JPY more. The Bank of Japan hopes the service sector can fuel demand-driven inflation and allow the BoJ to raise interest rates.

Economists forecast the Jibun Bank Services PMI to fall from 54.3 to 53.8 in May. However, investors should consider the sub-components, including input prices, employment, and new orders.

On Friday (May 24), inflation figures for Japan also need consideration. Softer-than-expected inflation numbers could leave the Bank of Japan in a holding pattern and impact buyer demand for the Yen.

Economists forecast the annual inflation rate to fall from 2.7% to 2.3% in April. Moreover, economists expect core inflation to decline from 2.6% to 2.2%.

US Economic Calendar: The Fed, The Services PMI, and Consumer Sentiment

On Wednesday (May 22), the US housing market will be in focus. Economists expect existing home sales to increase by 0.5% in April after sliding by 4.3% in March.

An improving housing market could fuel housing services inflation and impact investor bets on a September Fed rate cut. Additionally, the housing sector can influence consumer confidence and spending trends. Upward trends in consumer confidence and spending could fuel demand-driven inflation.

US jobless claims, preliminary private sector PMIs, and housing sector data will draw investor interest on Thursday (May 23). Barring an unexpected spike in US initial jobless claims, the Services PMI will likely impact the USD/JPY more. The services sector accounts for over 70% of the US economy and continues to fuel inflationary pressures.

Economists forecast the S&P Global Services PMI to increase from 51.3 to 51.4 in May. However, investors should also consider the sub-components, including new orders, input prices, and employment trends.

On Friday (May 24), the finalized Michigan survey and core durable goods will be in focus. The Michigan Consumer Sentiment and Inflation Expectation Indexes may influence the Fed rate path.

According to the preliminary survey, the Michigan Consumer Sentiment Index fell from 77.2 to 67.4 in May. The Michigan Inflation Expectations Index increased from 3.2% to 3.5%. Revisions to the preliminary figures could move the dial.

Beyond the numbers, the Fed will be under the spotlight. Fed Chair Powell will kickstart the week with a Sunday speech (May 19).

FOMC members Raphael Bostic (Mon/Tues/Thurs), Michael Barr (Mon/Tues), Christopher Waller (Mon/Tues/Fri), Philip Jefferson (Mon), Thomas Barkin (Tues), John Williams (Tues), Lisa Collins (Tues), and Loretta Mester (Tues) are on the calendar to speak. The Fed will also release the FOMC Meeting Minutes on Wednesday.

Short-term Forecast

Near-term USD/JPY trends will hinge on the Services PMIs, inflation numbers from Japan, and central bank commentary. However, a higher-than-expected US Services PMI and hawkish Fed chatter could tilt monetary policy divergence toward the US dollar. The Q1 GDP numbers from Japan could limit the near-term options for the BoJ.

USD/JPY Price Action

Daily Chart

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

A USD/JPY return to the 156 handle could support a move to the 158 handle. If the USD/JPY breaks out from the 158 handle, the bulls could take a run at the April 29 high of 160.209.

Central bank chatter, Services PMIs, and inflation numbers from Japan need consideration.

Alternatively, a USD/JPY drop below the 50-day EMA could signal a fall toward the 151.685 support level.

The 14-day RSI at 55.27 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.