USD/JPY Forecast: Fed Cautious Despite Cooling Inflation

• The dollar fell last week after the US released April’s consumer inflation figures.
• Fed’s Thomas Barkin warned that inflation was still not where it should be.
• Japan’s economy contracted more than expected in Q1.

The USD/JPY forecast looks bullish, with the dollar holding steady as Fed policymakers adopt a cautious stance despite the recent dip in inflation figures. Meanwhile, the yen remained vulnerable after data from last week revealed weak economic growth in Japan.

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The dollar fell last week after the US released April’s consumer inflation figures. Notably, the numbers came in lower, raising expectations that the Fed will cut rates twice this year. It also increased market confidence that last year’s downtrend was still intact. However, when policymakers spoke after the report, they maintained a cautious tone, with Thomas Barkin warning that inflation was still not where it should be. 

Meanwhile, the yen weakened following data on Thursday that showed Japan’s economy contracted more than expected in Q1. As a result, the Bank of Japan faces a challenge as it plans to hike interest rates. A weak economy is more vulnerable to high interest rates. Therefore, the central bank might hesitate to hike, especially if this trend continues. 

The weak yen has increased the cost of living in the country, which has put pressure on consumer consumption. Notably, the yen has lost 10% of its value against the dollar this year due to the gap in interest rates between Japan and the US. Sadly, the yen will likely remain weak if this gap remains.

USD/JPY key events today

Investors are not expecting high-impact economic reports from Japan or the US. As a result, the pair might consolidate.

USD/JPY technical forecast: Bulls battle for control at the 30-SMA

On the technical side, the USD/JPY price trades at a solid resistance zone after finding support at the 154.01 level. After a strong surge, the price has paused and is chopping through the 30-SMA in a tight range. The pause is below the 0.5 Fib retracement, a strong resistance level. 

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Meanwhile, the RSI has also risen to trade above 50, indicating stronger bullish momentum. The bullish bias will strengthen if bulls detach from the 30-SMA and break above the 0.5 Fib level. Furthermore, the price will likely retest the 158.00 resistance level. However, if the resistance holds firm, it will fall to 154.01.

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