Japan GDP: Will the Economy Contract?
On Friday, May 16, Japan’s Q1 2025 GDP report will affect the BoJ rate path and USD/JPY trends. Economists forecast Japan’s economy to contract by 0.1% quarter-on-quarter after expanding 0.6% in Q4 2024.
A more marked contraction could end expectations for a 2025 BoJ rate hike, weighing on Yen appetite. However, an unexpected expansion may leave the door open to a 2025 rate hike, bolstering Yen demand. Private consumption, expected to rise 0.3% after stalling in Q4, will be closely watched.
USD/JPY Outlook: Tariffs, Trade, and Consumption Trends
USD/JPY faces a crucial week as focus shifts from tariffs to trade deals. Trade developments will be crucial for risk sentiment and Yen trends. However, economic indicators and central bank commentary will also require consideration.
- Bullish Yen Scenario: Upbeat data, a hawkish BoJ stance, or an escalation in trade tensions could drag 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: Weak data, dovish BoJ signals, or easing trade tensions may drive the pair toward 150.
US Data to Drive Fed Policy and Dollar Demand
While trade developments will remain key, US inflation and sentiment data are also likely to influence Fed policy and US dollar demand. Key data releases this week include:
- CPI Report (May 13).
- Retail Sales (May 15).
- Initial Jobless Claims (May 15).
- Producer Prices (May 15).
- Michigan Consumer Sentiment (May 16).
Economists expect the annual inflation rate to climb from 2.4% in March to 2.6% in April. Rising inflation could sink bets on a June Fed rate cut, driving US dollar demand. However, a softer reading may revive Fed rate cut expectations, weighing on the US dollar.
Producer price trends also need consideration since producers adjust prices based on demand. Economists forecast producer prices to rise 0.2% month-on-month in April after falling 0.4% in March.
Meanwhile, retail sales will influence sentiment toward inflation, the economy, and the Fed’s stance. Economists forecast retail sales to fall 0.8% month-on-month in April after surging 1.4% in March. A sharper decline could revive recession fears and signal a softer inflation outlook, supporting a dovish Fed rate path. Conversely, a surprise rise in sales could signal a resilient US economy, a potential pickup in inflation, and a more hawkish Fed stance.
On Friday, May 16, the Michigan Consumer Sentiment Index will also be crucial. Economists expect the Index to fall from 52.2 in April to 52.0 in May. Waning consumer sentiment could impact spending, while a rebound in confidence may indicate a pickup in consumption.
Potential Price Scenarios:
- Bullish US Dollar Scenario: Upbeat economic data and hawkish Fed guidance could drive USD/JPY toward 150.
- Bearish US Dollar Scenario: Weaker-than-expected US economic data and a dovish Fed policy outlook data may pull USD/JPY toward 140.
Short-term Forecast:
This week’s USD/JPY trajectory will depend on trade sentiment, central bank forward guidance, and key macro data.
USD/JPY Price Action
Daily Chart
On the daily chart, the USD/JPY trades below the 50-day and 200-day EMAs, preserving a bearish setup.
A move above the 50-day EMA could open the door to testing resistance at the April 9 high of 148.280. Sustained buying pressure may enable the bulls to target the 149.358 resistance level.
On the downside, a drop below 142.5 could expose 140 and the September 2024 low of 139.576.
The 14-day Relative Strength Index (RSI) stands at 52.58, suggesting room for further gains, with overbought territory beginning above RSI 70.