USD/JPY forecast as Japan inflation slips, manufacturing improves

The USD/JPY price dropped for the third straight day as traders assessed the impact of this week’s Fed interest rate decision and the latest Japan inflation data. It dropped to a low of 130.45, the lowest point since February 10. This price was about 5.5% below the highest level this year.

Fed decision, Japan inflation data

The Japanese yen strengthened against the US dollar after the Fed decided to hike interest rates by 0.25% for the second straight month. This was an important decision since it came as the bank was fighting against inflation and ensuring financial stability following the collapse of several important banks.

In the first statement, the Fed said that some policy members had voted to pause further interest rate hikes. But in his press conference, Jerome Powell noted that more increases will likely be needed in the coming months. His statement was viewed by analysts as being moderately dovish.

The other key catalyst for the USD/JPY was the latest inflation and PMI data from Japan. In Japan, the headline consumer price index dropped from 4.3% in January to 3.3% in February. It dropped to -0.6% on a month-on-month basis. Core inflation, which excludes the volatile food and energy prices, dropped from 4.2% to 3.1%.

These numbers will ease the pressure of the Bank of Japan to act. Unlike other central banks, the BoJ has maintained a relatively dovish tone for years. It is one of the few central banks that is yet to hike interest rates. 

Meanwhile, flash PMI data showed that manufacturing activity improved as the PMI rose from 47.7 to 48.6. This increase was better than the expected 48.2. The services sector is doing much better as the flash PMI came in at 54.2. 

USD/JPY forecast

USD/JPY chart by TradingView

The four-hour chart shows that the USD to JPY pair has been in a strong downward trend in the past few days. In this period, it has managed to move below the 61.8% Fibonacci Retracement level. The pair has also formed a descending channel that is shown in green. It remains below the 50-day exponential moving average.

Therefore, the pair will likely continue falling as sellers target the next key point at 129.50, the 78.6% Fibonacci Retracement level. The stop-loss of this trade will be at 130.70.