USD/JPY Stalls Near Multi-Month Low On Post US CPI Data Release, Fed Interest Decision Awaited

• USD/JPY pair lat-lined on Wednesday during the Mid-Asian session and remains stalled Near two Months Low
• The U.S. dollar tumbles across the board as inflation rise eases
• Consumer prices rose less than expected in November, up 7.1% from a year ago
• BoJ Tankan: Manufacturers Index Slows To +7 In Q4

USD/JPY cross was flat-lined on Wednesday during the mid-Asian session and lacked clear direction in the aftermath of Lighter U.S. CPI data. As per press time, the pair is pinned near 3 month low ahead of today's crucial fed interest rate decision data.

Retreating treasury bond yields amid lighter-than-expected U.S. Inflation data fueled fueling hope that the Federal Reserve will slow the rate hikes. This forced the U.S. Dollar to trim most of its previous gains and extend the corrective pullback from the 114.776 level reached mid-last week. The U.S. Dollar index (DXY), which measures the value of the United States dollar relative to a basket of foreign currencies, was down 0.09% on Wednesday at 103.988 after falling by 0.9% the previous day.

The consumer price index, which measures a wide basket of goods and services, rose just 0.1% from the previous month and increased 7.1% from a year ago, the Labor Department reported Tuesday. Economists surveyed by Dow Jones had expected a 0.3% monthly increase and a 7.3% 12-month rate.

Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% annually, compared with respective estimates of 0.3% and 6.1%.

Commenting on the report. "Cooling inflation will boost the markets and take pressure off the Fed for raising rates, but most importantly this spells real relief starting for Americans whose finances have been punished by higher prices," said Robert Frick, corporate economist with Navy Federal Credit Union. "This is especially true for lower-income Americans who are disproportionately hurt by inflation."

That said, The report supported widely held expectations for a smaller Fed rate hike of 50 basis points when the central bank announces its decision later today during the Late North American Session. Fed funds futures have also priced in a lower terminal rate, where the Fed stops hiking, of 4.8%, expected to hit in May. That was down from about 5.1% seen late last month.

Shifting to the Japanese docket, the monetary policy divergence between the U.S. Federal Reserve and the Bank of Japan continues to weigh on the Japanese Yen. The backdrop still is tilted in favor of the USD bulls, and any further downside move still looks like a USD buying opportunity, especially with the Interest rate decision set to be released today.

A report today showed Large manufacturing in Japan had weakened in the fourth quarter of 2022. The Bank of Japan's quarterly Tankan Survey of business sentiment showed on Wednesday a diffusion index score of +7. That beat forecasts for a reading of +6 but was down from +8 three months ago.

The outlook came in at +6, matching expectations and down from +9 in the previous quarter. Large all industry CAPEX is now seen higher by 19.2 percent, down from 21.5 percent in the last three months.

The large non-manufacturers index came in at +19, beating forecasts for +17 and up from +14. The outlook was +11, missing forecasts for +16 and unchanged from three months earlier.

As we advance, investors now look forward to the U.S. Docket featuring the Fed Interest Rate Decision, FOMC Statement, Interest Rate Projection (Q4), and the FOMC Press Conference. The data reports plus Fed Chairman Jerome Powell's Speech would influence the near-term USD Price dynamics. This should assist traders in determining the next leg of a directional move for the USD/JPY Pair.

Technical Outlook: USD/JPY Four-Hour Price Chart

From a technical perspective, using a four-hour price chart, the price is flat-lined at the 135.756 level and is treading below the 135.982 key resistance level. If dip-sellers and tactical traders push down the price, the price will face initial resistance at the key resistance level plotted by an upward trendline of a Bearish Pennant chart pattern extending from the 2nd December 2022 lower low. If sellers manage to breach this floor (bearish price breakout-trendline breakout), the USD/JPY pair could turn vulnerable and accelerate the downfall towards testing the 133.682 key support level en route to the 132.535 support level. 

The RSI (14) at 39.53 is below the signal line, indicates bearish momentum, and is not far from flashing oversold conditions. But still, any downward price movement will be seen as buying opportunity. That said, traders might still refrain from placing aggressive bets ahead of the release of the Fed Interest Rate Decision later today in the Late North American session. Additionally, the impending Moving average divergence (MACD) crossover is on the verge of moving below the signal line, indicating a bearish sign for price action this week. 

On the flip side, if dip-buyers and tactical traders jump back in and trigger a bullish reversal, initial resistance appears at 50% and 61.8% Fibonacci retracement levels at 136.324 and 136.705 levels, respectively. If the price pierces this barrier, buying interest could gain momentum, creating the right conditions for an advance towards retesting the key resistance level (downward sloping trendline of the Bearish Pennant chart pattern extending from the 21st November 2022 Higher-Highs.). A convincing break above this floor (bullish price breakout-trendline breakout)would pave the way for an ascent toward the key supply zone ranging from 137.790 - 137.981 levels.