USD/JPY Rises For Consecutive Day To Trade A Few Pips From A Three-Week High, U.S. CPI Data Eyed
Key Takeaways:
- USD/JPY rose on Tuesday for a second consecutive day to trade just a few pips from a three-week high/149.573 level
- Sustained U.S. dollar strength amid hawkish Fed expectations help exert upward pressure on the USD/JPY pair
- Mixed Japanese inflation data fails to offer any support for the Yen
- Markets eye the U.S. CPI data for further clues on the Fed's future policy decisions
The USD/JPY cross attracted some buying on Tuesday during the mid-Asian session. It rose modestly to trade, just a few pips from a three-week high/149.573 level, marking a fifth consecutive session of positive gains and a second successive day of gains in the last four. The pair has managed to extend the modest rebound from a key support level touched on Monday and looks set to maintain its bid tone heading into the European session.
Increased market demand for the safe-haven buck amid receding bets for aggressive early rate cuts saw the U.S. dollar index, which measures the greenback against a basket of currencies, rise higher on Tuesday during the Asian session to trade firmly above the $104.200 mark and turned out to be a key factor that helped exert upward pressure on the USD/JPY cross.
Markets seem convinced that the Fed will leave rates unchanged during the March meeting and start cutting rates during the third quarter of 2024. This is in the wake of fresh, robust U.S. jobs data, which saw investors scale back their bets on the timing of interest rate cuts by the Federal Reserve.
Furthermore, the hawkish comments from a host of Fed speakers cautioning against aggressive early rate cuts further cemented market bets that the Fed would not cut rates during the March meeting. The influential FOMC member's comments join the past two weeks' Fed Chair's comments, in which he poured cold water on a March rate cut and reassured markets that the central bank will proceed carefully with interest rate cuts this year and likely will move at a considerably slower pace than the market expects.
Additionally, data on Monday from the Federal Reserve Bank of New York also showed that the one-year and five-year consumer inflation expectations were unchanged at 3% and 2.5%, respectively, supporting the view that rates are likely to stay higher for longer.
That said, CME's Fed Watch tool shows that Fed fund futures traders have also priced in an 86.5% chance the Fed will keep rates unchanged at 5.25% - 5.5% during the March meeting, with the first-rate cut now seen during the June meeting.
Shifting to the Japanese docket, a Bank of Japan (BoJ) report released earlier today showed producer prices in Japan rose by 0.2% year-on-year in January 2024, the same pace as in the prior month and above market forecasts of a 0.1% gain. Monthly, prices were flat after growing 0.3% in December.
The mixed Japanese inflation data fails to support the Yen. It is widely known that the Bank of Japan will stick to its ultra-dovish monetary policy stance in its fight against inflation in Japan, which contrasts heavily with that of the Fed.
Despite the combination of supportive factors, retreating Treasury bond yields amid uncertainty about the outlook for monetary policy might help limit further gains around the USD/JPY pair. This warrants caution for traders against submitting aggressive bullish bets. Moreover, traders must exercise caution and stay on the sidelines before releasing the key U.S. inflation data report.
As we advance, investors look forward to the U.S. docket featuring the release of key U.S. inflation data reports. These reports are expected to show that the headline inflation rate fell to 3%, the lowest since June, while the core inflation rate is expected to slow to 3.8%, the weakest in two-and-a-half years.
Technical Outlook: Four-Hour USD/JPY Price Chart
From a technical perspective, the price's ability to find acceptance above the technically strong 200-day (brown) Exponential Moving Average (EMA) at 146.352 and the subsequent break above the pivot level (P) at 148.820, followed by an extension of the modest bounce from the key support level plotted by an upward ascending trendline extending from the early-February 2024 swing lower-lows favors bulls and supports the case for northside moves. That said, the 149.573 level weekly high now seems to act as an immediate hurdle, about which, if buyers find acceptance above this level, buying interest could gain further momentum, creating the right conditions for an advance toward the 150.000 psychological mark, which sits directly below the 150.008 resistance level (R1). Sustained strength above the barricades will pave the way toward retesting the key resistance level plotted by an upward ascending trendline extending from the early February 2024 swing to higher highs. If bulls break above this level convincingly, it will set the shared currency up for further gains.
On the flip side, if sellers return and catalyze a bearish reversal, initial support comes in at the key support level (upward ascending trendline extending from the early-February 2024 swing lower-lows). A decisive move below this level will pave the way for a drop toward the pivot level (P) at 148.820. Sustained strength below this level will pave the way for an accelerated drop toward the 148.053 support level (S1), followed by the 146.854 floor.
