USD/JPY to Target Sub-139 on Hotter Inflation and BoJ Bets

Highlights

• The USD/JPY extended the winning streak to five sessions on Thursday.
• Investor hopes of a US soft-landing continued to support the post-US CPI Report recovery.
• However, it is a busy day ahead, with inflation numbers from Japan in focus this morning.

It is a relatively busy morning for the USD/JPY. Inflation figures from Japan will move the dial this morning. The markets are looking for reasons for the Bank of Japan to tweak its monetary policy stance from ultra-loose. A pickup in inflationary pressure would likely fuel expectations of a tweak to the yield curve control (YCC) policy.

Economists forecast the annual inflation rate to accelerate from 3.2% to 3.5% and core inflation to rise from 3.2% to 3.3%. Hotter-than-expected inflation numbers would likely force the Bank of Japan to tweak the YCC policy. However, we don’t expect the BoJ to begin considering a move away from negative interest rates.

On Thursday, Japan’s government forecast inflation to sit at 2.6% this fiscal year. In January, the government forecast inflation to hit 1.7% for the fiscal year. The government also revised its growth forecast from 1.5% to 1.3%.

The US Session

It is a quiet day ahead on the US economic calendar. There are no US economic indicators to move the dial later in the day. The lack of stats will leave the USD/JPY in the hands of market risk sentiment and sentiment toward the respective economies and monetary policy outlooks.

USD/JPY Price Action

Daily Chart

The Daily Chart showed the USD/JPY break through the 139.5 – 138.8 resistance band to test resistance at the 140 psychological level. After a five-day winning streak, the USD/JPY moved through the 50-day EMA (139.988) and remained above the 200-day EMA (136.577), signaling bullish momentum over the near and the longer-term time horizons.

Notably, the 50-day EMA pulled away from the 200-day EMA and reflected bullish near-term momentum.

Looking at the 14-Daily RSI, the 45.25 reading signals a bearish outlook, suggesting a fall through the 50-day EMA (139.988) to bring the 139.5 – 138.8 support band into play. However, a USD/JPY hold above the 50-day EMA (139.988) would give the bulls a run at the 141.2 – 141.9 resistance band.

4-Hourly Chart

Looking at the 4-Hourly Chart, the USD/JPY faces strong resistance at 140. The USD/JPY sits below the 200-day EMA (140.603) while holding above the 50-day (139.799). The EMAs send bullish near-term but bearish longer-term signals.

Significantly, the 50-day EMA narrowed on the 200-day EMA, signaling a move through the 200-day EMA (140.603) to target the 141.2 – 141.9 resistance band. However, a USD/JPY fall through the 50-day EMA (139.799) would give the bears a run at the 139.5 – 138.8 support band.

The 14-4H RSI reading of 58.24 sends bullish signals, with buying pressure outweighing selling pressure. Notably, the RSI supports a move through the 200-day EMA (140.603) to target the 141.2 – 141.9 resistance band.