Japanese Yen and Aussie Dollar Forecasts: Japan Inflation Surprises, USD/JPY Dips

Inflation Heats BoJ Rate Hike Debate and USD/JPY Vol

Japan’s national inflation numbers, released on Friday, May 23, reignited speculation about a potential Q3 Bank of Japan rate hike, pressuring the USD/JPY pair. Underlying inflation ticked up from 3.2% in March to 3.5% in April, while core inflation (ex-food and energy) rose to 3%, up from 2.9% in March and well above the BoJ’s 2% target.

Hotter inflation may raise the likelihood of a Q3 rate hike, especially if the US and Japan reach a trade agreement in Q2. The yen strengthened, sending USD/JPY from 143.899 to a session low of 143.810 before stabilizing around 143.851, reflecting markets’ shift toward a more hawkish BoJ outlook.

Rising expectations of a Q3 BoJ move contrasted with the latest Reuters poll conducted May 7-13:

• 59 of 62 economists (95%) expect the BoJ to leave rates at 0.50% on June 17.
• 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.

Economists cited persistent economic uncertainty and ongoing trade tensions as reasons for holding off on tightening. Policymakers will likely assess tariffs and trade flows before making their next move.

USD/JPY Daily Outlook: Fed Speakers, Housing Data on Radar

Later in the session, US new home sales data will draw interest. Economists expect new home sales to drop 4.7% month-on-month in April after surging 7.4% in March.

A sharp drop in new home sales could signal weakening economic momentum. Home buyers typically delay home purchases in an uncertain economic outlook. In this scenario, markets may raise bets on a Q3 Fed rate cut, sending USD/JPY toward the May 6 low of 142.350. However, a surprise increase in sales could support a more hawkish Fed stance, driving USD/JPY toward 145 and the 50-day EMA.

Beyond the data, traders should closely monitor Fed comments and trade developments, which continue to drive yen sentiment.

USD/JPY: Key Scenarios to Watch

• Bearish USD/JPY Scenario: Renewed trade tensions, weak housing data, or dovish Fed rhetoric could drag USD/JPY toward 142.5.
• Bullish USD/JPY Scenario: Positive trade developments, stronger housing data, or hawkish Fed cues may lift USD/JPY toward 145 and potentially the 50-day EMA.

See today’s full USD/JPY forecast with chart setups and trade ideas.

AUD/USD in Focus: US-China Trade News in Spotlight

On May 23, US-China trade developments and policy news from Beijing will influence AUD/USD trends. RBA Governor Michele Bullock recently underscored the threat of a trade war. She stated on May 20 that such conflict could push Australia into recession. She also warned:

“Australia’s economy could easily be compromised if a trade war between the US and China escalates… The market path is reflecting a possibility of a really bad outcome, pointing to a lower RBA cash rate.”

Renewed US-China tensions could impact Aussie dollar demand on recession fears, dragging AUD/USD lower. However, Beijing may counter with fresh stimulus, targeting domestic demand and consumption. Improving demand may drive AUD/USD higher, given China accounts for one-third of Aussie exports and Australia’s high trade-to-GDP ratio.

AUD/USD: Key Scenarios to Watch

• Bearish Aussie dollar Scenario: Renewed US-China friction, Beijing’s silence on stimulus, or dovish RBA cues may send AUD/USD toward the 50-day EMA and the $0.63623 support level.
• Bullish Aussie dollar Scenario: De-escalation in US-China trade tensions, Beijing stimulus, or hawkish RBA signals could drive the pair above the 200-day EMA toward the May 14 high of $0.65008.

Click here for a more comprehensive analysis of AUD/USD trends and trade data insights.

Aussie Dollar Daily Outlook: Fed Impact and Home Sales Data

The USD side of the equation will also influence AUD/USD later today. Weak US housing data may boost Fed rate cut bets, narrowing the US-Aussie interest rate differential in favor of the AUD. A more dovish Fed could send AUD/USD above the 200-day EMA toward $0.6450 and the May 7 high of $0.65144. On the other hand, strong data may widen the rate differential, dragging AUD/USD toward the 50-day EMA and the $0.63623 support level.

Key Market Drivers to Watch Today:

• USD/JPY: US-Japan trade talks and BoJ commentary.
• USD/JPY and AUD/USD: Fed signals, US housing data, and global trade headlines.
• AUD/USD: US-China developments, RBA signals, and China stimulus.

For more in-depth analysis, review today’s USD/JPY and AUD/USD trading setups in our latest reports.