Inflation to Fuel BoJ Policy Speculation
On Friday, June 20, inflation figures from Japan will likely impact expectations of a 2025 BoJ rate hike. Economists forecast Japan’s inflation rate (ex-food and energy) to rise 3.1% year-on-year in May, up from 3%, potentially extending further from the BoJ’s 2% target.
Hotter-than-expected inflation figures may revive hopes for a 2025 BoJ policy move. Conversely, softer inflation readings would likely support the BoJ’s wait-and-see stance.
BoJ Governor Kazuo Ueda recently lifted hopes of a 2025 policy move, stating that the Bank would raise interest rates higher if inflation moved sustainably to the 2% target and economic growth aligned with projections.
USD/JPY Outlook: High Volatility Driven by Trade and Data
- Bullish Yen Scenario: Strong Japanese data, a hawkish BoJ rate hold, or rising geopolitical tensions could send USD/JPY toward 140.
- Yen Carry Trade Unwind Risks: A USD/JPY drop below the September 2024 low of 139.576 could accelerate the Yen Carry Trade Unwind.
- Bearish Yen Scenario: Softer Japanese economic data, a dovish BoJ rate hold, or easing geopolitical risks may drive the pair toward 145.
US Retail Sales, the Fed, and Manufacturing to Dictate Dollar Trends
In the US, retail sales, the Fed’s interest rate decision, and manufacturing sector data will influence US dollar demand and USD/JPY trends.
Key events include:
- NY Empire State Manufacturing Index (June 16) to rise from -9.2 in May to -8.1 in June.
- US retail sales (June 17) to increase by 0.1% in May, mirroring April’s increase.
- FOMC Interest Rate Decision, Economic Projections, and Press Conference.
- Initial Jobless Claims (June 19) to increase from 247k (week ending June 7) to 255k (week ending June 14).
- Philly Fed Manufacturing Index (June 20) to rise from -4 in May to +2 in June.
Better-than-expected US manufacturing and labor market data may temper bets on a 2025 Fed rate cut, lifting US dollar demand. However, weaker numbers and a spike in jobless claims may raise bets on Fed policy easing.
Retail sales data could have more impact on the greenback ahead of Wednesday’s FOMC decision. A surprise fall in retail sales may dampen inflationary pressures, supporting a more dovish Fed stance. However, a higher reading may further temper Fed rate cut expectations.
FOMC Projections and Press Conference Pivotal for US Dollar Trends
While the data will influence US Dollar demand, the FOMC interest rate decision, economic projections, and press conference will be crucial. Economists expect the Fed to keep rates at 4.5% on June 18. Unless there is a surprise move, the focus will be on the economic projections and press conference.
A hawkish interest rate outlook and upbeat labor market and GDP forecasts could fuel US dollar appetite, driving USD/JPY higher. Conversely, signals of a Q3 Fed rate cut and weak projections could weigh on USD/JPY.
Potential Price Scenarios:
- Bullish US Dollar Scenario: Upbeat US data, a hawkish Fed hold, and easing geopolitical risks may send USD/JPY above 145 toward 146.285.
- Bearish US Dollar Scenario: Weak US data, a dovish Fed stance, and rising geopolitical tensions could drag USD/JPY toward 140.
Short-term Forecast:
USD/JPY’s near-term direction will depend on Middle East news, trade developments, economic data, and central bank commentary. That said, trade developments and geopolitical risks will likely carry the greatest market weight in the near term.
USD/JPY Price Action
Daily Chart
On the daily chart, the USD/JPY remains below the 50-day and 200-day EMAs, maintaining a bearish technical outlook.
A break above the 50-day EMA could support a move toward the May 29 high of 146.285. Sustained momentum above 146.285 may send the pair toward the May 12 high of 148.647.
On the downside, a break below last week’s low of 142.788 may bring the 140.309 support level and the September 2024 low of 139.576 into play.
The 14-day Relative Strength Index (RSI) sits at 49.06, suggesting potential for further losses before entering oversold territory (RSI< 30).
