USD/JPY Forecast: Yen Holds Ground; BoJ and US Services Sector in Focus

Highlights

• USD/JPY underwent a tumultuous Thursday session, sliding from its high of 148.462 to close at 147.569.
• August’s Japanese inflation steady at 3.1%, sparking anticipation for the Bank of Japan’s next move.
• As the US services eyes a potential November Fed rate hike, interest rates could influence demand-driven inflation.

Thursday Overview of USD/JPY Movements

On Thursday, the USD/JPY fell by 0.52%. Reversing a 0.33% gain from Wednesday, the USD/JPY ended the day at 147.569. During a choppy session, the USD/JPY rose to a high of 148.462 before declining to a low of 147.320.

Inflation and the Bank of Japan to Set the Tone for Q4

Japanese inflation figures for August drew investor interest this morning. The annual core inflation rate held steady at 3.1%, while the annual inflation rate softened from 3.3% to 3.2%. The inflation numbers may not incentivize the Bank of Japan to shift from negative rates.

Later this morning, the Bank of Japan will deliver its monetary policy decision. Economists expect the Bank of Japan to leave interest rates at -0.10%. A hold at -0.10% would give the Monetary Policy Statement and BoJ press conference more weighting.

Investors should track for further tweaks to the Yield Curve Control (YCC) policy and hints of a move away from negative rates.

Prelim private sector PMIs from Japan also need consideration. However, barring an unexpected contraction across the services sector, the BoJ will remain the focal point. Economists forecast the services PMI to fall from 54.3 to 54.0.

The services sector contributes 70% to the Japanese economy. A slump in service sector activity would garner the interest of the Bank of Japan.

US Services Sector in the Limelight

Later today, US private sector activity will be in the spotlight. After the hotter-than-expected jobless claims, a pickup in service sector activity would further fuel a November Fed rate hike.

Economists forecast the S&P Global Services PMI to rise from 50.5 to 50.6. Notably, the US services sector contributes over 75% to US GDP. Upward trends in services sector activity would fuel demand-driven inflation. Higher US interest rates would curb spending, impacting service sector activity and demand-driven inflationary pressures.

Short-term Forecast

The Bank of Japan is in the driving seat today. Suggestions of a move away from negative rates would counter hawkish Fed bets and support the beginning of a USD/JPY bullish trend reversal. A dovish Bank of Japan would leave the Japanese government to debate the need for intervention to bolster the Yen.

USD/JPY Price Action

Daily Chart

The USD/JPY remained above the 50-day and 200-day EMAs, affirming bullish price signals. However, a hawkish Bank of Japan would support a USD/JPY break below the 146.649 support level. A break below the 146.649 support level would bring the 50-day EMA into view.

A dovish Bank of Japan and a hotter-than-expected US services PMI would support a USD/JPY break above the 148.405 resistance level. While a break above the resistance level would bring 150 into view, speculation of Japanese government intervention should cap the upward potential.

The 57.99 14-Daily RSI supports a USD/JPY break above the 148.405 resistance level before entering overbought territory.

4-Hourly Chart

The USD/JPY hovers above the 50-day and 200-day EMAs, reaffirming bullish price signals. Avoiding a fall through the 50-day EMA would support a break above the 148.405 resistance level. A break above the resistance level would give the bulls a look at 150.

However, a break below the 50-day EMA would bring sub-147 and the 146.649 support level into play.

The 46.59 14-4 Hourly RSI reading supports a USD/JPY return to sub-147 before entering oversold territory.