Japanese Yen Forecast: USD/JPY Braces for BOJ and U.S. Data Avalanche

• USD/JPY correlations with risk assets remain strong
• Major U.S. data releases could shape rate cut expectations
• BOJ expected to hold, but updated forecasts are key
• 144.00 remains a crucial technical battleground

• Break of 144.00 could target 148.15, while dips may find bids at 142.50

Summary

In the absence of a negative shock in U.S. trade deal negotiations, the week ahead for USD/JPY traders will be dominated by major economic data releases in the United States and Japan, along with interest rate guidance from the Bank of Japan during its May monetary policy meeting. For now, directional risks for USD/JPY are skewing higher, with 144.00 the current battleground between bulls and bears.

Risk Sentiment Driving USD/JPY

The influence of risk sentiment on USD/JPY directional movements has continued to strengthen over the past fortnight, with daily correlation coefficients with safe havens such as the Swiss franc and gold near perfect versus the U.S. dollar. That means they’ve almost always moved in the same direction. Similarly, the correlation between USD/JPY with Nasdaq 100 futures, and the inverse relationship with VIX futures, has strengthened to 0.86 and -0.88 over the same period. Put simply, USD/JPY is now trading as a risk sentiment proxy rather than a play on interest rate differentials.

Source: TradingView

Hard Data Key to Hard Landing Risks

While that suggests economic data and central bank activity will play a secondary role in determining USD/JPY directional shifts this week, the weakening of the relationship with rate differentials may simply reflect that we’ve had no major macroeconomic events recently, leaving headlines relating to U.S. trade negotiations and short-term market positioning to drive yen movements. However, that will change dramatically this week with a raft of top-tier economic data from the United States, including the advanced Q1 U.S. GDP report, PCE inflation, incomes and spending figures for March, along with April non-farm payrolls on Friday.

Source: Refinitiv (U.S. EDT)

The abovementioned releases will dominate proceedings, not only because they are known market movers but also because they reflect actual economic activity rather than simply sentiment. For months, soft survey data has been rolling over, raising concerns as to whether actual activity will be next. It’s probably too soon to make a definitive call on the outcome, although markets will be ultra-sensitive to signs of weakness. It also means that soft survey data this week—like consumer confidence, JOLTS job openings, and ISM manufacturing and services—may not be as impactful as usual.

Fed Rate Cut Pricing Returns to Pre-Liberation Day Levels

As things stand, futures markets are pricing around 83bps of rate cuts from the Fed in 2025, a level not dissimilar to what was seen prior to U.S. Liberation Day in early April. That implies rates traders are no longer as fearful about the potential economic impact of U.S. trade policy as they were just a few weeks ago.

Source: TradingView

With Federal Reserve members now in a media blackout period before the May FOMC meeting, it will be left up to the data to shift rate cut pricing. If the data is weak, expect rate cut pricing to grow, and vice versa if strong. Weak data would also point to downside risks for USD/JPY on a pure rate differential basis, but it will likely come down to the reaction from riskier asset classes to determine whether that materialises. Softness may be embraced as good news, whereas very weak data may escalate concerns surrounding a hard economic landing.

BOJ on Hold, Guidance Key

Source: Refinitiv  (U.S. EDT)

Even with major economic data releases on the horizon, the main event for USD/JPY traders from Japan will come from the BOJ’s May interest rate decision, including the release of updated economic forecasts. As discussed late last week, if not for trade tensions, there would be a strong case for the BOJ to hike rates given evidence of growing price pressures in Japan’s capital, Tokyo, in April.

Source: Bloomberg

However, with 25% U.S. tariffs already in place on Japanese auto exports, and with no trade deals yet complete, markets expect the BOJ to leave policy rates unchanged at 0.5%, pricing just a 3.5% risk of another 25bp hike being delivered. Looking further out, only 20bp of hikes are priced over the remainder of 2025, ensuring BOJ guidance on the rates outlook will be the key piece of information that will influence USD/JPY direction. Aside from Governor Ueda’s post-meeting press conference at 3.30pm JST, what the bank signals in its updated economic forecasts will also be important.

Source: BOJ

In its last forecasts offered in January, the BOJ saw Japanese GDP growing in a range between 0.9–1.1% in fiscal year 2025, with underlying inflation measures sitting above its 2% mandate. On this occasion, the GDP forecasts are likely to be cut due to trade headwinds, hinting at downside risks for its latest inflation forecasts. If that plays out, it will likely spark a further curtailment of rate hike pricing and help weaken the yen.

USD/JPY Risks Biased Higher

Source: TradingView

Looking at USD/JPY from a technical standpoint, the corrective rebound seen last week stalled at 144.00, placing emphasis on price action around this level in the near-term. Friday’s bullish engulfing candle warns of a potential topside break, and while indicators like RSI (14) and MACD remain in negative territory, both are now trending higher, suggesting momentum may be in the process of skewing higher. The price may be in the early stages of forming a rising wedge, although it’s too early to make a definitive call.

A clean break of 144.00 would open the door for a decent run higher with little visible resistance evident until 148.15. The 50-day simple moving average is another level of note, found at 147.45. On the downside, bids may emerge on dips towards 142.50. A break of that level would open the way for a retest of 141.65.

-- Written by David Scutt

Follow David on Twitter @scutty