USD/JPY Forex Technical Analysis – Volatile Trade Ahead if CPI Headline is Hot, but ‘Core’ CPI Cools

The Dollar/Yen is inching higher early Wednesday as traders searched for direction ahead of the release of the U.S. Consumer Price Index (CPI) report at 12:30 GMT.

The report could be the source of volatility because traders are expecting one piece of the data to come in hot, while another could show inflation has peaked.

The Fed believes that inflation will eventually peak, but it will be particularly interested in the data that shows it may have already peaked. This data could potentially convince the Federal Reserve to ease on its policy tightening in autumn. Any easing of interest rates could put pressure on the Dollar/Yen.

At 07:03 GMT, the USD/JPY is trading 137.211, up 0.344 or +0.25%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.37, up $0.26 or +0.38%.

US Consumer Inflation Expectations

Headline CPI is expected to rise by 1.1%, compared with 1% in May, according to Dow Jones. On a year-over-year basis, CPI is seen rising by 8.8%, up from May’s 8.6%, the highest since 1981.

Core inflation, on the other hand, is expected to continue to cool, slowing now for a third month. Excluding energy and food, June’s core CPI was expected to rise 0.5%, compared with 0.6% in May. That would be 5.7% year-over-year jump in June, down from 6% in May. Core CPI peaked at 6.5% in March.

Short-Term Outlook

Trader reaction to 136.860 is likely to determine the direction of the USD/JPY on Wednesday.

Bullish Scenario

A sustained move over 136.860 will indicate the presence of buyers. This could trigger the momentum needed to challenge the recent high at 137.751. This price is a potential trigger point for an acceleration to the upside with no target in place at this time.

Bearish Scenario

A sustained move under 136.860 will signal the presence of sellers. The first downside target is a minor pivot at 136.251. Taking out this level could trigger an acceleration to the downside with the next key target a short-term retracement zone at 134.386 to 133.703.

Side Notes

Look for the USD/JPY to trade steady to better if the CPI data meets expectations. This won’t alter the Fed’s plans for a 75 basis point rate hike in July and a 50 basis point rate hike in September, but it will leave additional rate hikes up in the air.

If headline inflation prints a 9.0% then the USD/JPY could soar to a new multi-year high.