USD/JPY analysis: Slightly softer US CPI increases chance of Fed policy hold

Article By: ,  Market Analyst
  • USD/JPY analysis: The bullish trending pair continued to march on towards its June high of 145.00, after the initial dollar selling was bought
  • US CPI missed on headline but only just; rising oil among factors that could keep inflation elevated
  • Dollar could correct lower as positive influences mostly priced in

 

The USD/JPY continued to march on towards its June high of 145.00, after the initial dollar selling was bought in that aftermath of the inflation data.

 

Dollar regains poise after CPI-inspired drop

 

Following the release of US CPI, the US dollar initially sold off, while equities and gold rallied. But the small beat on the headline front wasn’t enough to cause a complete reversal in the trend. So, once the dust settled, the dollar found renewed support with the likes of the GBP/USD and EUR/USD giving back big chunks of their earlier gains, while gold relinquished its entire CPI-inspired gains. All told, CPI didn’t cause any significant change in the dollar’s ongoing trend. But we doubt the greenback has much fuel left in the tank. So, watch out for a correction soon – although the USD/JPY is probably not the best pair to take advantage of a potential dollar reversal, due to the fact the BoJ’s policy is extremely loose compared to other central banks.

 

Can US inflation remain elevated?

 

There are some concerns that while US CPI inflation is moderating, there are some signs that it could heat up again. Falling energy prices has been a big contributor behind the recent declines in inflation. But with WTI oil prices nearing $85, pushing up gasoline prices, this could prevent CPI falling back to the Fed’s target, forcing the central bank to maintain a restrictive policy for longer. So, I do think that energy and wage inflation in the services sector will keep the headline rate elevated.

 

But this will be offset by China exporting disinflation, where consumer prices have moved into the deflation territory. So, the most likely outcome is that price pressures will generally move lower but at a much slower pace than in recent months. 

 

The Fed will feel that it has already done enough to bring inflation towards its 2% target in the medium term. What’s more, global monetary policy is quite restrictive if you look at the developed economies. As a result, I think inflation will move further lower over time, and the Fed will start to loosen its belt next year rather than tighten it further this year.

 

For that reason, the US dollar could soon start trending lower again, boosting the appeal of some dollar-denominated assets. But we do need to see a clear reversal pattern before turning bearish on the dollar. Until that happens, the dollar bears should proceed with extra care.

UoM surveys up next

 

Until the Fed’s next meeting in September, we will have one more inflation and jobs report. Any further weakening of CPI could cement expectations of a policy hold. But the Fed will also monitor other macro indicators, including consumer confidence. On Friday, we will have the latest reading on the University of Michigan’s Consumer Sentiment and Inflation Expectations surveys to look forward to.

 

But if most of these indicators point to continued strength in the US economy, then this should keep the dollar supported on the dips against the yen, which continues to fall out of favour because of the BoJ’s ongoing ultra-loose policy stance.

 

USD/JPY analysis: no change in current trend yet

The USD/JPY is continuing to make higher highs. With prior resistance at 143.50 turning into support, the path of least resistance continues to be to the upside, with the bulls eying the June high of 150.00 as their net target. If we get above 145.00 then this would likely increase the risk of fresh intervention by the BoJ. A move back below 143.50 is what the bears would like to see as minimum before potentially looking for any bearish trades, given that almost all the indicators on the chart look bullish. For example, price is still above the 21-day exponential average, which means the near-term trend is objectively bullish.

Source: TradingView.com

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

 

 

 

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.

© FOREX.COM 2024