USD/JPY Rallies as Inflation Concerns Grow Ahead of US PCE Report

Highlights

• Dollar/Yen gains due to anticipated inflation report and hawkish Fed comments
• Fed officials express concerns about high levels of inflation and potential rate increases
• Investors await release of February PCE inflation figures

Overview

On Friday, the Dollar/Yen saw significant gains as traders placed their bets on the U.S. Core PCE Price Index inflation report, anticipating stronger than expected data.

Furthermore, traders reacted positively to hawkish comments from Fed officials regarding the possibility of a rate hike.

However, the potential for limited gains exists if issues in the banking sector create headwinds on the economy, potentially leading to a quicker cool-down of price pressures than anticipated.

At 10:00 GMT, the USD/JPY is trading 133.378, up 0.686 or +0.52%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.23, up $0.10 or +0.14%.

Fed Officials Express Concerns Over Inflation and Potential Rate Increases

Three Federal Reserve officials, including Susan Collins, Neel Kashkari, and Thomas Barkin, expressed concerns about high levels of inflation and the possibility of more rate increases.

While Collins suggested that the recent banking sector problems could partially offset the need for additional rate increases, Kashkari did not specify what actions should be taken.

Barkin cautioned that although financial sector issues could help the Fed achieve its mission to get inflation back to 2% more quickly, there are still uncertainties ahead.

All three officials acknowledged that the strength of the economy is robust, but there are emerging signs of slowing labor demand.

Markets Anticipate February PCE Inflation Figures Tracked by Federal Reserve

Investors are eagerly anticipating the release of the February Personal Consumption Expenditures (PCE) inflation figures, which are closely tracked by the Federal Reserve.

The January figures revealed a significant surge in consumer spending, further highlighting the importance of the upcoming PCE report.

The PCE inflation figures are scheduled to be released at 1230 GMT, and economists polled by Reuters are predicting a slight decrease in the core PCE index to 0.4% in February from January, with an annual rate of 4.7% expected to remain steady.

Short-Term Outlook

The USD/JPY is currently showing bullish momentum, trading at 133.378 with a gain of 0.686 or +0.52%. The price action suggests the Forex pair is headed into 133.776 – 134.752. With the main trend down, we’re looking for sellers to come in on a test of this area.

The market sentiment remains optimistic due to the anticipation of strong PCE inflation figures and hawkish comments from Federal Reserve officials regarding potential rate increases.

However, the potential for limited gains exists due to the emerging signs of slowing labor demand and concerns over the banking sector’s impact on the economy.

The release of the PCE inflation figures is likely to determine the short-term tone for the USD/JPY pair, with a better-than-expected reading likely to sustain the bullish momentum, while a weaker-than-expected reading could lead to a bearish tone.

Overall, the USD/JPY pair’s short-term forecast is bullish, but the market sentiment could change depending on the PCE inflation figures’ outcome.