The USD/JPY pair finds itself ensconced within a narrow trading corridor, influenced by both bullish market fundamentals and the looming prospect of intervention by the Bank of Japan (BOJ) to bolster the yen. This intervention threat has cast a shadow over immediate prospects for USD/JPY despite significant inflation data releases in the United States this week.
The prevailing sentiment leans towards selling rallies rather than buying dips or breaks, as long as the Japanese government maintains its firm stance against yen weakness. Additionally, geopolitical tensions in the Middle East add another layer of uncertainty for traders.
Key Drivers for USD/JPY
Predicting the trajectory of USD/JPY this week hinges on two critical factors: the outlook for US interest rates and geopolitical developments. While the latter remains unpredictable, traders focus on events likely to exert the most substantial influence, considering market positioning and technical indicators.
Three notable events stand out: the US consumer price inflation report scheduled for Wednesday, the US Producer Price Index report on Thursday, and the European Central Bank’s interest rate decision, also on Thursday. Although the Federal Reserve’s speaking calendar is packed, the tone is expected to be heavily influenced by these events, in conjunction with last Friday’s robust US non-farm payrolls report.
While headlines, including those from the Federal Open Market Committee (FOMC) minutes on Wednesday, will abound, most are expected to be noise rather than impactful for USD/JPY.
Preview of US Consumer Price Index (CPI)
Following two months of surpassing market expectations in both headline and core figures, the upcoming CPI data may offer clarity on whether the recent acceleration in inflation signifies a sustained trend or a transient anomaly.
Projections suggest a 0.3% increase in both headline and core CPI, a slight deceleration from February. While this indicates a slowdown, it remains insufficient for inflation to meet the Fed’s 2% target promptly.
The “supercore” inflation, excluding housing costs, will be closely watched as the Fed has highlighted it as a key metric. Despite other readings showing signs of inflation, the supercore figure notably decelerated in February, thereby mitigating pressure on the dovish rate outlook.
Potential Market Reactions for USD/JPY
In the event of no upside surprises in CPI rates, it’s anticipated that US short-term bond yields will decline, consequently narrowing the yield differential between the US and Japan and weighing on USD/JPY. Conversely, another upside surprise, especially in core inflation, could propel both USD/JPY and yields upward, signaling a reduced likelihood of Fed rate cuts in 2024.
Focus on US PPI and ECB Decision
Similar dynamics apply to Thursday’s producer price inflation report, with a higher reading likely to boost USD/JPY and vice versa. The ECB’s monetary policy meeting holds significance as fluctuations in the euro, a major component of the US dollar index, could influence other G10 currencies, including the yen. While no policy rate changes are expected, there’s growing speculation about the ECB signaling an earlier rate cut, potentially weakening the euro against the dollar and dragging the yen along.
Regarding geopolitics, a de-escalation of tensions in the Middle East is poised to support USD/JPY, whereas a significant escalation could prompt capital repatriation to Japan, exerting downward pressure on USD/JPY.
Technical Analysis of USD/JPY
Despite bullish fundamentals favoring USD/JPY amid dwindling rate cut expectations by the Fed and widening interest rate differentials with Japan, the threat of BOJ intervention looms large. This has stifled rallies near the 152 resistance level, creating a stalemate scenario.
While the technical outlook hints at bullish momentum, with a breakout above 152 suggesting substantial gains, the risk of BOJ intervention dampens the upside potential significantly. Therefore, caution is advised, with a preference for selling rallies unless there’s a notable shift in Japan’s stance on yen weakness.
Key support and resistance levels for USD/JPY are situated around 151.50, 151.20, 150.80, 150.27, with a more pronounced support zone between 149.58 and 149.00. Traders are advised to tread carefully in the current market environment.
