Japan’s household spending has been a key factor influencing the USD/JPY pairing. Beyond just the numbers, investors need to closely monitor threats of intervention and commentary from the Bank of Japan (BoJ). The concern about the impact of a weak Yen on the Japanese economy has the potential to sway both government and BoJ decisions. Discussions around a possible intervention or BoJ support for a July interest rate hike, along with aggressive cuts to Japanese Government Bonds, could push the USD/JPY towards 150. Finance Minister Shunichi Suzuki even mentioned the possibility of intervention, stating, “We would respond appropriately to excessive currency moves.” On the other hand, some experts like Bruegel Senior Fellow Alicia Garcia Herrero believe that monetary policy tools, such as the Bank of Japan starting quantitative tightening, could be more effective in supporting the Yen than intervention.
Investors must be cautious of potential downside risks for the USD/JPY. Economic indicators from Japan may send mixed signals, but any moves to strengthen the Yen could significantly impact the pairing. Economic data from the US also plays a crucial role in shaping monetary policy intentions for both the BoJ and the Federal Reserve. This week will be pivotal for the US dollar as speculation continues about a September Fed rate cut. The ISM Manufacturing PMI figures released on Monday will be closely watched by investors. Despite accounting for less than 30% of the US economy, the numbers could sway expectations of a soft landing for the US economy. Economists forecast the ISM Manufacturing PMI to increase from 48.7 to 49.0 in June, which might not directly influence sentiment towards the Fed rate path but could provide valuable insights into the overall economic health.
The upcoming JOLTs job openings and job quits data could also influence investor expectations of a September rate cut. Economists predict a decline in job openings from 8.059 million in April to 7.850 million in May and a decrease in job quits from 3.507 million to 3.500 million. A significant drop in job openings and quits might signal a weakening US labor market. This could potentially impact wage growth, reduce disposable income, curb consumer spending, and dampen demand-driven inflation. Weaker labor market conditions are often a cause for concern and could have ripple effects on the economy.
Wednesday will see a renewed focus on the US labor market and the services sector. Economists are predicting a 170k increase in employment in June, following a 152k rise in May, according to the ADP report. Initial jobless claims are also expected to rise from 233k to 235k in the week ending June 29. A less significant increase in employment numbers and a sharper rise in jobless claims could fuel further speculation about a September rate cut. The services sector, which accounts for over 70% of the US economy, will continue to play a crucial role in driving inflation trends. Economists expect the ISM Services PMI to fall from 53.8 to 52.5 in June, with a drop in the ISM Services Prices Index from 58.1 to 57.8. Slower service sector activity and softer input price pressures would support expectations of a September rate cut.
Friday’s US Jobs Report is anticipated to have a significant impact on the USD/JPY pairing. Weaker wage growth, an unexpected rise in the US unemployment rate, and a less-than-expected increase in nonfarm payrolls could lead to a decline in the USD/JPY pairing. Forecasts suggest that average hourly earnings are expected to increase by 3.6% year-on-year in June, nonfarm payrolls to rise by 180k, and the US unemployment rate to be at 4%. Recent trends in jobless claims, as highlighted by Arch Capital Global Chief Economist Parker Ross, point towards a softening labor market, with continuing claims reflecting a more substantial decline. The jobless claims data for the week ending June 22 indicated a higher unemployment rate could be on the horizon.
Overall, a combination of factors from both Japan and the US will continue to shape the movements of the USD/JPY pairing, keeping investors on their toes as they navigate through this dynamic market.