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James Hyerczyk
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Japanese Yen
Japanese Yen

The Dollar/Yen has been on a tear since holding support at 110.859 and breaking through three main tops at 111.140, 111.396 and 111.477. Besides the technical momentum, the Forex pair is also being driven by a bullish outlook for U.S. interest rates on the back of Wednesday’s better-than-expected U.S. Producer Price Inflation report.

At 1200 GMT, the USD/JPY is trading 112.507, up 0.509 or +0.45%.

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The current price action has put the Dollar/Yen in a position to challenge three other main tops at 113.381, 113.631 and 113.745. The catalyst behind a move into this area could be today’s U.S. Consumer Price Inflation report.

To recap yesterday’s key event, U.S. producer prices increased slightly more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years.

According to the U.S. Labor Department, the producer price index for final demand climbed 0.3 percent last month also lifted by increases in gasoline prices. In the 12 months through June, the PPI advanced 3.4 percent, the largest gain since November 2011. Traders were looking for an increase of 0.2 percent and an annual gain of 3.2 percent.

The Core PPI also rose 0.3 percent in May. Economists had forecast a gain of 0.2 percent. In the 12 months through June, the core PPI rose 2.7 percent.

Forecast

The Fed’s key weapon to avoid runaway inflation is its ability to raise interest rates as aggressively as it takes to prevent inflation from overheating the economy. The trick is to avoid raising too fast to kill economic growth. At this time, the market is pricing in at least two more rate hikes this year.

Going into this week, there was some doubt about whether inflation was running hot enough to raise rates in both September and December. This doubt was raised on Friday, following the relatively tame Average Hourly Earnings portion of the U.S. Non-Farm Labor report. However, yesterday’s solid PPI report seems to have squashed those fears. This triggered the breakout in the USD/JPY.

Today’s catalyst will be a report on U.S. consumer inflation, due to be released at 1230 GMT.

The U.S. consumer inflation report could temporarily take market focus away from trade worries, particularly if it surprises to the upside like yesterday’s producer prices report.

Traders are looking for both the headline Consumer Inflation Index and the Core Consumer Inflation Index to post a 0.2 percent increase. Beating this number will likely fuel another surge to the upside. A miss could trigger a huge correction back to support.

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