USD/JPY Forecast: Yen Strengthens but US CPI Holds the Key to Next Price Move

Highlights

• USD/JPY witnessed a reversal from Friday, ending Monday at 146.576 after a 0.81% slide.
• BoJ’s direction contrasts with bets on the Federal Reserve ending its monetary tightening phase.
• The imminent US CPI Report is pivotal in determining USD/JPY’s path; economists expect softer core inflation.

Monday Overview

On Monday, the USD/JPY slid by 0.81%. Reversing a 0.33% gain from Friday, the USD/JPY ended the day at 146.576. The USD/JPY rose to a high of 147.271 before falling to a low of 145.897.

Bank of Japan Policy Shift Signals Resonate

Comments from Bank of Japan Governor Ueda over the weekend will continue to resonate today. The Bank of Japan Governor discussed the conditions to shift away from ultra-loose monetary policy. Investors continue to respond to the prospects of the BoJ moving away from negative interest rates.

The shift in BoJ forward guidance contrasts with market bets on the Fed ending its monetary policy tightening cycle.

US CPI Report Holds the Key to the USD/JPY Trajectory

The US CPI Report remains a hotly discussed topic this morning. With the report out on Wednesday, forecasts suggest softer core inflation, which continues to bolster bets on the Fed pausing rate hikes this month.

According to the CME FedWatch Tool, there is a 92% chance of the Fed leaving rates unchanged in September. Bets on a November rate hike fell at the start of the week. The probability of a 25-basis point November hike stood at 39.8% on Monday versus 43.6% on Friday.

Inflation numbers aligned with forecasts would support bets on the Fed hitting the brakes. However, the USD/JPY remains exposed to the risk of hotter-than-expected core inflation numbers.

Later today, the Redbook and WADE Report should not impact the USD/JPY. The focus is on the CPI Report.

Short-term Forecast

A shift in BoJ forward guidance should offer further Yen strength. However, the US CPI Report remains the key driver. Easing bets on further Fed rate hikes would shift focus to the timing of an interest rate cut. In contrast, the BoJ is looking to move away from negative rates.

USD/JPY Price Action

Daily Chart

The USD/JPY hovered below the 146.649 resistance level. Failure to break above the resistance level would leave the 144.894 support level in play. Investor bets on a BoJ move away from negative rates support a fall to sub-145.

However, a break above the 146.649 resistance level would give the bulls a run at 147. Investor jitters ahead of the US CPI Report on Wednesday could deliver modest USD/JPY support.

The 56.29 14-Daily RSI indicates the USD/JPY can return to 147 before entering overbought territory.

4-Hourly Chart

The USD/JPY sits below the 50-day EMA, a bearish price signal, while above the 200-day EMA, a bullish longer-term price signal. However, a break above the 146.649 resistance level would give the bulls a run at 147.

Failure to break above the resistance level and 50-day EMA would leave the 200-day EMA and 144.894 support level in play. We expect buying appetite at 145, with the 200-day EMA confluent with the 144.894 support level.

The 44.56 14-4H RSI reading indicates the USD/JPY can test the 200-day EMA before entering oversold territory.