USD/JPY Eyes a 136 Breakout on a Hotter than Expected US CPI Report

It is a quiet start to the day for the USD/JPY. There are no economic indicators from Japan for investors to consider.

The lack of economic indicators will leave market risk sentiment to provide direction ahead of the US session.

Despite the better-than-expected US Jobs Report, the markets are betting on the Fed ending its monetary policy tightening cycle. However, the US CPI Report could redefine market sentiment.

With the Bank of Japan committed to remaining ultra-loose, a hotter-than-expected US CPI Report will likely spook investors and force the markets to price in a June interest rate hike, a possible hard landing, and, push back the timing of an interest rate cut.

USD/JPY Price Action

This morning, the USD/JPY was up 0.02% to 135.237. A mixed start to the day saw the USD/JPY fall to an early low of 135.122 before rising to a high of 135.254.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to avoid the 135.096 pivot to target the First Major Resistance Level (R1) at 135.472. A move through the Tuesday high of 135.360 would signal a bullish USD/JPY session. However, the market risk sentiment and the US CPI Report must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 135.736 and resistance at 136. The Third Major Resistance Level (R3) sits at 136.376.

A fall through the pivot would bring the First Major Support Level (S1) at 134.832 into play. However, barring a US CPI-fueled sell-off, the USD/JPY pair should avoid sub-134.500 and the Second Major Support Level (S2) at 134.456. The Third Major Support Level (S3) sits at 133.816.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The USD/JPY sits above the 50-day EMA (135.037). The 50-day EMA pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A USD/JPY hold above the 50-day EMA (135.037) would support a breakout from R1 (135.472) to target R2 (135.736) and 136. However, a fall through the 50-day EMA (135.037) would bring S1 (134.832) and the 100-day EMA (134.699) into view. A fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a busy day on the US economic calendar. The all-important US CPI Report will be in the spotlight. Unsurprisingly, investors have been cautious in the lead-up to today’s report. Inflation remains sticky in other economies, and the Fed may face a similar issue.

With inflation in focus, we expect FOMC member commentary to also influence. On Tuesday, FOMC Vice Chair John Williams shared his views on the economic outlook and monetary policy, saying,

“First of all, we haven’t said we’re done raising rates. We’re going to make sure we’re going to achieve our goals, and we’re going to assess what’s happening in our economy and make the decision based on that data.”

Williams also said he did not have an interest rate cut in his baseline forecast and could hike rates if required.

Beyond the economic calendar, the banking sector, the US debt ceiling, and corporate earnings also need consideration.