USD/JPY outlook: Ahead of US CPI 140 is on the horizon

The USD/JPY will remain in focus with key US inflation data due for release today. The greenback could potentially extend its losses if CPI comes in weaker or in line with the expectation. If so, this could provide further pressure on US bond yields after their latest dip, after opinion polls pointed to Harris having done better than Trump in the first presidential debate overnight. Meanwhile, with the Bank of Japan officials turning more hawkish, a weaker US CPI report could send the USD/JPY towards or even below the 140 handle. As things stand, the USD/JPY outlook is therefore bearish. Only a rather strong CPI report could change that outlook, which is unlikely in my view.

Yen extends rise on hawkish BoJ comments

Another wave of the carry-trade unwind may be on the cards if the USD/JPY continues to drop. Overnight, the BOJ swooped in with a fresh batch of hawkish rhetoric. Nakagawa from the BOJ didn’t hold back, pointing out that “real interest rates are still deeply negative” and hinting at a possible shift in monetary policy if inflation stays on track.

USD/JPY outlook remains bearish

A quiet start to this week’s economic calendar gave the dollar some breathing room, holding its ground against most major currencies—except the yen. Today, however, the greenback was falling again, and this helped to extend the USD/JPY’s losses after last week's sharp drop, triggered by disappointing US data, including a softer-than-expected nonfarm payrolls report. This confirmed the Fed’s concerns about a cooling job market.

Fed Chair Powell had already signalled in August that rate cuts were coming in September, so while the jobs data wasn’t weak enough to push investors toward a 50-basis point cut, it only prompted a mild recovery for the dollar against other currencies. Initially, Friday’s soft jobs report shook the rates markets, but sentiment quickly pivoted towards a more cautious 25 basis point cut for the upcoming FOMC meeting.

Now, however, there’s growing chatter about more aggressive rate cuts later this year and into early 2025, especially after a Fed official floated the idea of "front-loading" cuts. And with the Bank of Japan leaning hawkish and crude oil prices dropping—good news for import-reliant nations like Japan—the USD/JPY outlook remains bearish.

US CPI coming up

As we head into the second half of the week, all eyes are on some big macro events—today’s US inflation report and the European Central Bank’s rate decision tomorrow. After last week’s jobs data, I’m sticking with my bearish stance on the dollar ahead of the CPI release. The market is still divided on how big the rate cut will be, with no clear consensus. Meanwhile, the Fed, looking to avoid a major shake-up in the dollar ahead of next week’s meeting, will be hoping that this week’s inflation numbers bring some clarity to the uncertainty.

With US CPI inching closer to the Fed’s target, Powell has already signalled he's on board with a rate cut at the September 18 FOMC meeting. Today’s CPI report is crucial—it’s the last major data point before that meeting and could guide whether policymakers go for a 50-basis point cut or play it safe with the standard 25. Needless to say, it could draw serious attention, especially if the numbers come in way off expectations. Inflation slowed for the fourth straight month in July, down to 2.9% year-over-year, the lowest we’ve seen since March 2021. For August, it’s expected to drop even further to 2.6%, with core CPI holding steady at 3.2% year-over-year. Anything in line with these numbers or slightly lower should keep the dollar under pressure.

USD/JPY technical analysis

Source: TradingView.com

The USD/JPY remains on a bearish path from a technical point of view, given the bearish recent price action. We have seen the breakdown of several support levels, trend lines and moving averages, all pointing to a bearish technical USD/JPY outlook. On a macro front, it is all about bond yields driving this pair, so watch yields closely too as they also continue to make new lows on the month.

US yields took another hit post the Harris-Trump debate last night, potentially setting the stage for USD/JPY to break below 140 – something we haven't seen since July last year. Standing on the way of 140.00 is the December low at 140.25, which is now the next downside target for the bears.

In terms of potential resistance, the area between 141.70 to 142.20 is the first major area of trouble. Here, the USD/JPY had found support back in August and again earlier this week, before rates broke below it. Further resistance is seen around 143.45/50 area.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R