USD/JPY Weekly Forecast: The Treasury pause that refreshes

• Federal Reserve pledges and repledges its inflation-fighting commitment.
• Commodity prices and WTI ease to three-month low.
• US Treasury rates drift lower undermining USD/JPY.
• FXStreet Forecast Poll outlines the USD/JPY technical weakness.

Tuesday’s 24-year high in the USD/JPY at 136.71 was brief, but the subsequent decline and recovery affirmed the interest rate dynamic driving many US dollar based currency values.

Federal Reserve Chair Jerome Powell, testifying in Congress, said that the central bank needs to see clear proof that inflation is slowing before limiting rate increases, though he admitted that higher rates could bring on a recession. 

Fed Governor Michelle Bowman suggested in an interview with Reuters that a 75 basis point increase in July followed by 50 points at later meetings was the appropriate scenario. “I am committed to a policy that will bring real federal funds rate back into positive territory.” With the core Personal Consumption Expenditures Price Index at 4.9% in April and forecast to be 4.7% in May, that would place the final base rate more than 100 basis points above the 3.4% projected by the central bank at the end of this year and 200 points above the current upper target of 1.75%. 

Treasury rates in the US have retreated somewhat from their mid-month peak while Japanese Government Bond (JGB) returns were static but the differential remains the primary driver of the USD/JPY. 

The Bank of Japan (BoJ) made no change in its easy money policy at its last meeting nor in its open-ended commitment to yield curve control in the JGB market. Inflation has lagged expectations despite global price surges through headline CPI is above the bank’s 2% target. National CPI was 2.5% (YoY) in May, unaltered from April though less than the 2.9% forecast. Core CPI stayed at 0.8%. 

Global commodity prices have been falling since the second week of June and are back to their levels of early March. West Texas Intermediate (WTI) sank as low as $103.90 on Wednesday but had recovered more than 3% by Friday morning to over $107.00.   

The weak US business outlook from S&P Global, with manufacturing PMI registering its lowest score since July 2020, and a steadily falling housing market tempered rate hike expectations and contributed to Thursday’s USD/JPY selling. American consumer confidence slipped again in June as the Michigan Survey was revised to 50.

Inflation remains the most pressing economic topic and the crux of central bank policy in the US. The Fed has not had to confront the possible fallout of its drive to curb inflation. The economic signs are increasingly gloomy and history favors a recession induced by rapid rate increases, but until the data is unequivocal the Fed will stay the course. 

USD/JPY Outlook

Sovereign interest rates are the foundation of currency valuations. The BoJ-Fed differential has widened substantially this year and the rise in the USD/JPY is the direct result. The Fed’s apparent determination to confront inflation will be tested as the US creeps closer to a recession but the governors will keep their nerve at least until the second quarter GDP release on July 28. The USD/JPY will retain a positive aspect as long as the US-Japan rate difference is intact and the central bank policies are at opposite poles. 

Within that overall trend there is considerable room for variation and temporary, even extensive changes. Thursday’s decline of over two figures was both profit based and a reaction to this week’s pullback in US rates. 

Japanese Retail Trade (sales) and Industrial Production for May will likely confirm the low state of the economy. Business sentiment in the quarterly Tankan Report is expected to improve from its level in the first three months of the year. 

Durable Goods in the US will repeat the weakness of Retail Sales and Conference Board Consumer Confidence that of the Michigan survey. The final edition of first quarter GDP is expected to be unchanged at -1.5%. Personal Income and Spending and the accompanying PCE inflation gauges will be the week's highlight. Weakness in consumption and higher than forecast inflation will play into the recession scenario. Traders should note the Real Disposable Income and Spending figures from the Bureau of Economic Analysis (BEA) that are issued with the PCE data for an accurate reading of consumption.

Until US Treasury rates resume their climb the USD/JPY is unlikely to move above this week’s nearly two-and-a-half-decade high.  

The outlook for the USD/JPY is consolidation and range trading between 134.50 and 136.50.  

Japan statistics June 20–June 24

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US statistics June 20–June 24

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Japan statistics June 27–July 1

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US statistics June 27–July 1

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USD/JPY technical outlook

The MACD (Moving Average Convergence Divergence) illustrates the dependence of the USD/JPY on interest rates. A minor drop in US Treasury rates brought the price line into contact with the signal line and a cross can be expected on the good chance that the USD/JPY consolidates below 135.00. Such a move would blunt upward momentum but not signal a new lower trend. The Relative Strength Index (RSI) remains firmly in positive territory without suggesting an immediate move higher. Average True Range (ATR) observes that the range above 135.00, being largely without precedent, is subject to higher than average volatility. 

Support and resistance lines above 131.00 are best observed on the 4-hour charts with supplementary information on the dailys. 

4-hour charts

Resistance: 135.30, 135.60, 136.00, 136.25, 136.65

Support: 135.00, 134.50, 134.00, 133.50

Daily chart

Resistance: 136.30, 136.65, 137.00, 137.50

Support: 135.00, 134.30, 132.60, 132.00

Moving Averages

21-day 132.89, 50-day 130.52, 100-day 124.70, 200-day 119.21

FXStreet Forecast Poll

The FXStreet Forecast Poll is uniformly bearish to one quarter. Given that the March to June ascent is almost completely intact, technical weakness is to be expected.