USDJPY Forecast: Bracing for US CPI Volatility

• Fed Powell’s Testimony and Monetary Policy Anticipations
• Japan’s Inflationary Pressures and Monetary Policy Expectations
• USDJPY Technical Analysis

Japan’s Economic Indicators:

The Japanese Yen's sustained decline, coupled with rising energy prices, has led to increased import costs and accelerated wholesale inflation. The corporate goods price index rose at the fastest year-on-year pace since August 2023, reaching a seven-month high of 122.7. The latest Bank of Japan (BOJ) core CPI and Producer Price Index (PPI) both increased by 0.3%, lifting market expectations for a potential rate hike in the upcoming policy meeting. BOJ Governor Kazuo Ueda stated that they would raise interest rates if yen movements significantly impact inflation.

US Monetary Policy Updates:

Fed Chair Jerome Powell’s testimony on the semi-annual monetary policy report indicated considerable progress towards controlling inflation, with the latest figures aligning with a disinflationary trend. Powell hinted that delaying rate cuts could pose risks to overall economic activity. Although no specific rate cut date was mentioned, the Fed is waiting for more favorable data to confidently move in that direction.

The next significant data point is the US CPI figures due on Thursday, which are hoped to show further declines. The upcoming policy decision is confirmed to not likely involve a rate increase, but the timing for loosening monetary policy is still under consideration, depending on updated economic figures.  

USDJPY Forecast: USDJPY - 3 Day Time Frame – Logarithmic Scale

Source: Tradingview

The USDJPY is currently within an uptrend but is trading in an indecisive range ahead of the US inflation data. Respecting the boundaries of an up-trending parallel channel since December 2023, the current range lies in the mid-channel area, presenting two potential breakout scenarios given the anticipated market volatility. 

Bullish Scenario: An increase in US inflation figures, along with a breakout above the 162.20 high, could pave the way for the continuation of the uptrend towards the upper end of the channel, potentially reaching levels of 163.30, 165, and 166.30.

Bearish Scenario: A decrease in inflation figures could add bearish pressure on the US Dollar, and a break below 160 for the USDJPY could lead to a retest of the 159.30 and 158 levels.

With the pace of the Fed’s monetary policy decisions outpacing that of the BOJ, the greater effect on the USDJPY chart this week is expected to come from developments in US economic activity metrics and monetary policy expectations.

--- Written by Razan Hilal, CMT