USD/JPY post-NFP recovery puts US CPI in focus

USD/JPY Outlook

USD/JPY snaps the series of lower highs and lows from earlier this week amid the larger-than-expected rise in US Non-Farm Payrolls (NFP), and data prints coming out of the US may continue to sway the exchange rate as the update to the Consumer Price Index (CPI) is anticipated to show sticky inflation.

USD/JPY post-NFP recovery puts US CPI in focus

USD/JPY appeared to be reversing course following the failed attempt to test the March high (137.91), with the Relative Strength Index (RSI) reflecting a similar dynamic as it reversed ahead of overbought territory.

However, USD/JPY retraces the decline following the Federal Reserve interest rate decision as the 253K NFP print continues to show a tight labor market, and signs of persistent price growth may fuel a larger recovery in the exchange rate as it puts pressure on the central bank to further combat inflation.

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FOREX.com Economic Calendar

Even though the headline CPI is expected to narrow to 4.4% from 5.0% per annum in March, the gauge for core consumer prices is projected to increase to 5.8% from 5.6% per annum during the same period.

An uptick in the core CPI may generate a bullish reaction in the US Dollar as it dampens speculation for a Fed rate cut in 2023, and it remains to be seen if the development will sway the monetary policy outlook as market participants anticipate a looming change in regime.

Source: CME

The CME FedWatch Tool continues to reflect expectations for lower US interest rates before the end of the year even as Chairman Powell and Co. ‘are prepared to do more if greater monetary policy restraint is warranted,’ and the speculation for U-turn in Fed policy may keep USD/JPY within the yearly range especially as the Bank of Japan (BoJ) plans to ‘conduct a broad-perspective review of monetary policy, with a planned time frame of around one to one and a half years.’

With that said, USD/JPY may attempt to retrace the decline from the monthly high (137.78) as it snaps the series of lower highs and lows from earlier this week, and an uptick in the core US CPI may keep the exchange rate afloat as it raises the Fed’s scope to pursue a more restrictive policy.

Japanese Yen Price Chart – USD/JPY Daily

Chart Prepared by David Song, Strategist; USD/JPY on TradingView

• USD/JPY appeared to be reversing course ahead of the March high (137.91), with the Relative Strength Index (RSI) reflecting a similar dynamic amid the failed attempt to push above 70.
• However, USD/JPY snaps the series of lower highs and lows from earlier this week as it bounces back from the 50-Day SMA (133.86), and the failed attempt to break/close below the 132.60 (38.2% Fibonacci retracement) to 133.90 (23.6% Fibonacci retracement) region may push the exchange rate back towards the 136.00 (23.6% Fibonacci extension) handle as the bearish price action unravels.
• Need a move above the 200-Day SMA (137.00) to bring the March high (137.91) back on the radar, but USD/JPY may track the yearly range if it fails to breakout of the opening range for May.

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--- Written by David Song, Strategist