USD/JPY outlook remains bearish ahead of key data from US and Japan

The USD/JPY has managed to bounce back somewhat but more losses could be on the way should incoming US data continue to paint a bearish outlook on the world’s largest economy. Data from Japan is also coming into focus as the market speculates about the Bank of Japan’s next rate hike. The USD/JPY outlook has turned negative in recent weeks on expectations the BoJ will continue hiking rates, after the release of hotter than expected Japanese inflation and not-so-strong US data caused the yield spread between the US and Japan to narrow. Attention now turns to US GDP before a raft of Japanese and US is released tomorrow.

Tariff threats keeps dollar bears at bay

Donald Trump delivered somewhat contradictory statements on Wednesday regarding the implementation of tariffs, leaving investors scratching their heads. European levies could either target all exports from the bloc or focus on specific sectors, and tariffs on Mexico and Canada are still on the cards, though it’s still unclear whether these will come into effect as early as March. 

The tariff narrative remains rather muddled. On one hand, we’ve seen announcements, while on the other, negotiations are still very much in play, leaving room for a potential pause or extension. Investors are still trying to decipher what’s actually at stake here. So far, it’s been a case of much more noise than substance, which is why the FX markets have not been able to move more decidedly in one or the other direction yet.

Key US data this week: GDP and Core PCE 

With Nvidia’s earnings now out of the way, the focus now shifts back to tariffs and data. On the macro calendar, today brings US GDP data and initial jobless claims shortly, alongside a fresh round of Fed speeches. Q4 GDP data is expected to show 2.3% annualized reading and jobless claims are seen rising rise to 221K. Come Friday, attention will turn to the Fed’s preferred inflation gauge—the core PCE price index—alongside a handful of second-tier data releases.

Rising US economic concerns undermine USD/JPY outlook

Ahead of these data releases, US bonds have rallied in recent days amid growing economic unease. Weaker-than-expected data has reinforced these concerns, prompting rates traders to fully price in two quarter-point rate cuts by the Federal Reserve this year. The benchmark 10-year yield, after falling for six consecutive sessions to around 4.25%, has seen a slight rebound today.  But should this prove to be a temporary respite, we could see the yield spread between US and Japan narrow further and undermine the USD/JPY outlook further.

Earlier this week, the Conference Board’s (CB) US consumer confidence report disappointed, marking its sharpest decline since August 2021. This added to the gloom following last week’s underwhelming University of Michigan (UoM) survey. 

Other data that have been released in recent days have painted a similarly bleak picture. The S&P Global flash services PMI, for example, unexpectedly slipped into contraction territory, while existing home sales plummeted 4.9%. New home sales also took a hit, dropping 10.5% in January, partly due to cold weather and a surge in housing inventory to its highest level since late 2007. 

Meanwhile, long-term inflation expectations have crept higher amid discussions of potential tariffs, stoking fears of stagflation. Last week’s UoM survey revealed a striking 30-year high in long-term inflation expectations, reaching 3.5%—a reflection of consumer sentiment on inflation over the next five years. 

All in all, it’s a rather mixed bag for the US economy, with plenty for investors to ponder as they navigate the murky waters ahead with uncertainty over tariffs and what not.

Japanese data in focus 

The Bank of Japan brought its negative interest rates policy to a close last March, and ever since, the question on everyone’s lips has been: just how much further will the central bank tighten its belt and step away from its ultra-loose monetary stance? 

The USD/JPY pair has traditionally been driven by US bond yields and data from the world’s largest economy. However, of late, Japanese data has started to stir the pot, injecting a bit of volatility into the mix. This comes amid growing speculation that the Bank of Japan may well have more rate hikes up its sleeve, while the Federal Reserve has shifted into a wait-and-see mode following a series of cuts last year. 

The yen’s renewed sensitivity to domestic data means USD/JPY traders should not ignore incoming data, particularly as recent robust figures have bolstered the case for the BOJ to continue down the path of rate hikes. 

Earlier this month, Japanese nominal wages surged at their fastest pace in nearly three decades, while GDP figures revealed that the economy has outperformed expectations. 

All eyes will now be on Friday’s release of the Tokyo consumer price index reading, which is expected to keep the BOJ firmly on track for future rate hikes. 

Technical USD/JPY outlook: Key levels to watch

Source: TradingView.com

From a technical point of view, the path of least resistance on the USD/JPY remains to the downside, until we see a key bullish reversal formation. I don’t think yesterday’s small doji candle and today’s small gains mees that criteria. Granted, the USD/JPY bears drove down rates to the target they were eyeing all these weeks – i.e., liquidity below December’s low of 148.65 – but more losses could be on the way once the impact of short-side profit-taking abates.

Resistance now comes in at the prior support and psychological level of 150.00. I wouldn’t be surprised if the selling pressure resumes around this area. If not, we could see some moderate further upside before the recovery potentially runs out of steam around the next area of resistance circa 151.00-151.25 zone.

In terms of the next support levels to watch beneath December’s low of 148.65, round handles like 148.00, 147.00 etc., will be the next interim targets until rates potentially drop to test the 144.50-145.00 area, which is my next major downside objective.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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