USD/JPY Forecast: Steady as Anticipation Builds Ahead of US Inflation Report

Highlights

• Dollar/Yen trading remains cautious ahead of U.S. inflation data and Fed meeting.
• Market focuses on U.S. Labor Department’s CPI report for potential impact on Fed’s rate-hike cycle.
• Fed expected to keep rates on hold, while BOJ maintains ultra-dovish stance.

Overview

The USD/JPY is trading within a narrow range on Tuesday, as investors exercise caution ahead of key U.S. inflation data and the Federal Reserve’s two-day monetary policy meeting. The focus now shifts to the U.S. Labor Department’s CPI report, which is anticipated to reveal a slight cooling of inflation in May. This could potentially provide the Fed with room to pause its aggressive rate-hike cycle when it announces its interest rate decision on Wednesday.

Crucial Inflation Report Shapes Market

The outcome of the inflation report will play a crucial role in shaping market expectations. If inflation surpasses the consensus, there could be an increased likelihood of a Fed rate hike this week. However, indications suggest that the Fed is unlikely to raise rates at this time. Analysts anticipate that the Fed will adopt a dovish tone. This could lead to downward pressure on the U.S. dollar.

Market Sentiment Favors Steady Fed

According to the CME FedWatch tool, market pricing currently indicates an approximately 84% chance that the Fed will maintain interest rates at this week’s meeting. This reflects the prevailing sentiment that the Fed will hold steady and refrain from making any immediate changes.

BOJ to Maintain Dovish Stance

Turning our attention to the Bank of Japan (BOJ), they are scheduled to announce their monetary policy decision on Friday. The general expectation is that the BOJ will maintain its ultra-dovish stance. It’s also expected to continue with its yield curve control (YCC) settings. However, it is worth noting that the BOJ has a history of effecting policy changes without prior signaling.

For now, the central bank is likely to convey a dovish message or indicate no intention of policy change until a different direction is pursued. Nonetheless, our outlook suggests that the BOJ could potentially alter its YCC policy in July, although such a move might occur without explicit prior indication.

Caution Prevails Ahead of CPI, Fed

In summary, the Dollar/Yen is trading cautiously within a narrow range as investors await U.S. inflation data and the outcome of the Federal Reserve’s monetary policy meeting. The potential cooling of inflation could grant the Fed room to pause its rate-hike cycle. Meanwhile, traders are expecting the BOJ to maintain its ultra-dovish stance and yield curve control settings, with a possible policy change in the future.

Technical Analysis

The USD/JPY currency pair has been stuck in a tight trading range between 142.216 (R1) and 137.859 (PIVOT) for the past three weeks. This is reflecting indecisiveness among investors and foreshadowing a potential surge in volatility. Traders are eagerly awaiting a catalyst that could break the deadlock. Two key events on the horizon hold the potential to do just that.  They are today’s CPI report and the highly anticipated Federal Reserve interest rate decision on Wednesday.

USD/JPY at Neutral Momentum

At the heart of this range lies the midpoint at 140.038, which is where the USD/JPY currently finds itself, signaling a neutral momentum. Considering the prevailing upward trend, buyers are likely to step in if there is a pullback towards the 137.859 (PIVOT) level, as they seek value opportunities. However, failure to hold this level could pave the way for a downside move, potentially triggering a near-term acceleration towards 134.783 (S1).

In essence, the overall bias remains skewed to the upside, with the impending news on Tuesday or Wednesday likely to dictate whether traders opt to buy into a pullback at a value area or chase strength driven by market-moving developments.

Resistance & Support Levels

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