• Japan’s economy likely shrank less than expected in the March quarter.

• The dollar traded near an 8-week low due to increased rate cut expectations.

• Investors eagerly await the US monthly employment report.

The USD/JPY outlook points south as the yen strengthens on prospects of a smaller-than-expected contraction of Japan’s economy in Q1. Meanwhile, the dollar was trading near an eight-week low as traders looked forward to the US monthly employment report.

A Reuters poll on Friday revealed that Japan’s economy likely shrank less than expected in the March quarter. Moreover, economists expect a rebound in the second quarter due to pay hikes and tax cuts. Nevertheless, the outlook for the economy remains clouded, given the weak yen and high import costs, which are hurting consumption.

Japan’s government and the Bank of Japan are concerned about the yen’s continuing weakness. Although the currency has rebounded recently, it remains near the 34-year lows that triggered interventions in April and May.

Meanwhile, the greenback wallowed on Friday after poor economic reports raised the chances of a Fed cut in September to 69%. Moreover, investors are expecting at least two 25 basis-point cuts this year.

However, this outlook might change with the upcoming nonfarm payrolls report. Private payrolls came in lower than expected. Therefore, there is a high chance that the NFP figures will miss forecasts. This would strengthen the case for a cut in September and further weaken the dollar. However, if the figures beat forecasts, the outlook for Fed cuts will become clouded.

Investors are also preparing for policy meetings in Japan and the US next week. Both central banks will likely maintain rates, keeping the gap in interest rates wide.

USD/JPY key events today

• US average hourly earnings m/m
• US non-farm employment change
• US unemployment rate

USD/JPY technical outlook: Bears prepare to confirm a reversal

On the technical side, the USD/JPY price almost confirms a reversal from bullish to bearish. The price trades below the 30-SMA with the RSI under 50, showing solid bearish momentum. It recently broke below its bullish trendline and pulled back to retest it. At the same time, it retested the 30-SMA as resistance before reversing lower.

If bears keep control and the price lowers, it signals the start of a new downtrend. Consequently, USD/JPY will likely revisit the 154.02 support level.

https://www.forexcrunch.com/blog/2024/06/07/usd-jpy-outlook-japans-q1-contraction-milder-than-expected/