Conversely, a softer PMI reading, coupled with falling prices, new orders, and employment, may ease BoJ rate hike bets, driving the pair higher. In Q1, Japan’s economy contracted by 0.2%, with external demand down 0.8% quarter on quarter.
The GDP numbers supported fading bets on a Q3 BoJ rate hike. In the latest Reuters Poll, conducted between May 7-13:
39 of 58 (67%) predict the BoJ will maintain the policy status quo in Q3 2024, up from just 36% in the April survey.
52% forecast a 25-basis-point rate hike in 2025.
However, signs of economic recovery could revive Q3 BoJ rate hike predictions and boost Yen demand, challenging the current market consensus.
Beyond the data, trade developments remain a key driver. Rising trade tensions could trigger a flight for safety, driving Yen demand, while easing trade frictions may push USD/JPY higher.
USD/JPY Daily Outlook: The Fed and Manufacturing in Focus
Later in the session, the US manufacturing sector will face scrutiny as trade tensions linger. Economists forecast the ISM Manufacturing PMI to remain at 48.7 in May, holding below the neutral 50 level.
A lower PMI reading, combined with rising prices but falling new orders and slower job creation, may fuel stagflation fears, impacting US dollar demand. In this scenario, USD/JPY may drop toward the May 27 low of 142.102. Conversely, a higher PMI reading, stable prices, rising new orders, and a pickup in job creation could ease fears of a US recession, potentially delaying Fed rate cuts. A more hawkish Fed stance could drive USD/JPY toward the May 29 high of 146.285.
AloJapan.com