USD/JPY Forecast: Trader Anticipation Grows as US CPI Data Shapes Fed’s Choices

Highlights

• Dollar/Yen influenced by upcoming US inflation data and Fed rate decision.
• Inflation figures crucial for Fed’s decision-making process and interest rate hikes.
• Dollar’s resilience supported by potential future rate increases by the Fed.

Overview

The Dollar/Yen is inching lower on Thursday, driven by anticipation of next week’s two significant events: the release of U.S. inflation data for May and the upcoming Federal Reserve interest rate decision. Investors eagerly awaited these developments, which could have a substantial impact on the currency markets.

High Stakes: U.S. Inflation Data

Market participants are particularly interested in the U.S. inflation data expected to be released on June 13. Forecasts suggest a 0.30% increase in prices for May. This figure carries immense significance as it will heavily influence the Federal Reserve’s decision-making process. Should inflation continue to rise, it could strengthen the case for further interest rate hikes to manage the economy effectively. Conversely, if the data indicates a moderation in price growth, it may prompt a more cautious approach from the Fed.

Inflation Surges, Rate Cut Hopes Fade

Additionally, the market’s diminished expectations for a rate cut by the Federal Reserve this year stem from the consistent surpassing of the inflation target. Notably, inflation remains persistent not only in the United States but also across other G10 countries. As a result, central banks are likely to approach their policy decisions with caution and prudence. Consequently, central banks in these nations are likely to exercise caution and prudence when making their policy decisions, taking into account the broader economic landscape.

Dollar Resilient Amidst Rate Divergence

Despite potential pressure from rate hikes implemented by foreign central banks, the dollar is poised to withstand losses due to the possibility of an additional rate increase by the Federal Reserve in July. The Fed’s indication that it may not be finished with raising rates could diverge from the policies of central banks in Canada, Australia, and possibly the European Central Bank during this month’s meeting. This divergence in monetary policy trajectories may provide support for the dollar.

Japan’s Economy Surpasses Expectations

In related economic news, revised data revealed that Japan’s economy performed better than initially estimated for January-March. The post-pandemic recovery witnessed a pickup in domestic spending and company restocking efforts, offsetting the negative impact of slowing global demand on exports. Japan’s economic resilience is noteworthy, and sustaining this growth will depend on continued wage hikes and robust private consumption, both of which are regarded as core policy objectives by the Bank of Japan and the government.

Underpinned Ahead of CPI Data, Fed Rate Decision

The market’s anticipation of significant upcoming events, particularly the imminent release of U.S. inflation data and the Federal Reserve’s imminent interest rate determination, ultimately contributed to the recent surge in the USD/JPY. These events carry substantial implications for currency markets.

The forthcoming inflation data will be closely scrutinized, shaping the Federal Reserve’s approach to interest rates and influencing the dollar’s performance in the short term. Despite challenges from foreign central bank actions, the potential for further rate hikes by the Fed may, nonetheless, provide a favorable outlook for the USD/JPY.

Technical Analysis

The USD/JPY has been trading inside 142.216 (R1) and 137.859 (PIVOT) for two weeks. This indicates investor indecision and impending volatility. It also means that traders are waiting for a catalyst. That catalyst could be next week’s CPI report or Fed interest rate decision.

The mid-point of this range is 140.038. The Forex pair is currently straddling this level, which suggests neutral momentum.

Since the main trend is up, buyers are likely to come in on a pullback into 137.859 (PIVOT). These traders will be looking for value. However, if it fails then look out to the downside. This could trigger a near-term acceleration into 134.783 (S1).

If the pivot holds and the upside momentum increases, then we’re going to assume that buyers are chasing the USD/JPY because of some bullish news. This could create the upside momentum needed to challenge 142.216 (R1). Look for counter-trend sellers on the first test of this level.

Essentially, we have an upside bias with the news likely to decide whether to buy a pullback into a value area, or chase news-driven strength.

Resistance & Support Levels

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