USD/JPY Fundamental Weekly Forecast – Steep Break Coming if US Consumer, Producer Inflation Miss Forecasts

The Dollar/Yen posted a two-sided trade last week before closing marginally higher. The price action on Friday suggests a possible shift in investor sentiment late in the week that could lead to follow-through selling this week.

Last week’s rally stalled slightly below a key top at 114.580. Our work suggests a break back under a former top at 113.21 could lead to some heavy selling pressure with the minimum downside target 112.480 to 111.984.

For the week, the USD/JPY settled at 113.725, up 0.040 or +0.04%.

The USD/JPY ended a choppy week on Friday with a lower close after data for September showed U.S. private sector and government job gains that fell short of expectations while wage increases slowed on an annualized basis during the month, easing concerns about a large run-up in inflation.

What this means is that wage inflation is creeping higher, but it has not accelerated as the market was fearing. This could mean the Fed won’t have to be as aggressive with rate hikes as the rapid run-up in Treasury yields suggested.

Remember that although the Fed has been raising interest rates since December 2015, Treasury traders have not moved T-notes and T-bonds in lock-step with the rate hikes. Last week’s surge in Treasury yields may have been a form of catching up to the Fed. The rally may have even overshot the Fed.

If inflation is still tame and the Fed is still set on gradually raising rates then Treasury yields could come back to earth. This would put pressure on the USD/JPY.

Forecast

The price action late in the week suggests we may be looking at a short-term top in the USD/JPY. Although the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish Bank of Japan is still bullish for the Dollar/Yen. We may see some position adjustments this week which could weaken the Forex pair.

Not only could we see a dip in U.S. Treasury yields on profit-taking in the T-Note and T-Bond markets, but we could also see safe-haven buying into the Japanese Yen if emerging market weakness continues to weigh on U.S. stock markets and overall demand for higher risk assets.

There are no major reports out of Japan this week, but the U.S. is scheduled to release data on Producer Inflation and Consumer Inflation. They are expected to come in with relatively tame 0.2% increases.

The USD/JPY could sell off significantly if the PPI and CPI numbers come in below expectations.