Why Do This Week’s Numbers Matter?
Last week, the Bank of Japan’s Summary of Opinions showed two key trends. The economy will likely moderate, with underlying CPI inflation expected to be sluggish and face downside risks. Despite the near-term outlook, the BoJ would continue raising interest rates if the economy and price trends align with forecasts.
Upbeat data would support a more hawkish stance, while a slowing economy may allow the BoJ to hold rates steady in the nearer term.
USD/JPY Outlook: High Volatility Driven by Geopolitics and Economic Indicators
- Bullish Yen Scenario: Upbeat Japanese data, hawkish BoJ signals, or a breach of the Iran-Israel ceasefire could send USD/JPY toward 142.5.
- 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: Weaker Japanese economic indicators, dovish BoJ cues, or progress toward a US-Iran nuclear agreement may drive the pair toward 150.
US Services PMIs and Labor Market Reports to Spotlight US Dollar and the Fed
In the US, labor market data and services sector PMI numbers will influence the Fed rate path and US dollar appetite.
Key events and forecasts include:
- JOLTs Job Openings (July 1): drop from 7.391 million in April to 7.1 million in May.
- ADP Employment Change (July 2): increase by 90k in June after rising 37k in May.
- US Jobs Report (July 3): average hourly earnings to rise 3.9% in June, mirroring May’s increase, with the unemployment rate to remain unchanged at 4.2%.
- ISM Services PMI (July 3): rise from 49.9 in May to 50.3 in June.
Weaker job openings, subdued wage growth, and a higher jobless rate would support Fed rate cut bets by signaling softer inflation and cooling consumer demand. Conversely, strong labor and services data may ease pressure on the Fed to act in July.
The services sector accounts for around 80% of US GDP, making its performance pivotal. Rising prices may delay cuts despite economic weakness, with robust activity potentially pushing rate cut expectations further out.
While the data will influence US dollar demand and USD/JPY trends, trade developments also require consideration.
Potential Price Scenarios:
- Bullish US Dollar Scenario: Upbeat US data, hawkish Fed rhetoric, and easing trade tensions may send USD/JPY toward 150.
- Bearish US Dollar Scenario: US recession jitters, dovish Fed cues, and escalating trade tensions could drag USD/JPY toward 142.5.
Short-term Forecast:
USD/JPY’s near-term outlook hinges on trade developments, economic data, and central bank guidance. That said, trade developments and geopolitical risks will likely carry the greatest market weight in the week ahead.
USD/JPY Price Action
Daily Chart
On the daily chart, the USD/JPY trades below the 50-day and 200-day Exponential Moving Averages (EMA), signaling a bearish technical outlook.
A break above the 50-day EMA could support a move toward last week’s high of 148.026 and the 200-day EMA. Sustained buying pressure may pave the way to the 149.358 resistance level.
On the downside, a break below last week’s low of 143.749 could expose the 142.5 level. Increased selling pressure may enable the bears to target the crucial 140 psychological level and the September 2024 low of 139.576.
The 14-day Relative Strength Index (RSI) sits at 49.40, suggesting USD/JPY has room to drop to 142.5 before entering oversold territory (RSI< 30).