USD/JPY Forecast: Rangebound as US Debt Limit Dispute Lingers & Inflation Worries Persist

USD/JPY Highlights

• USD/JPY slips as US debt ceiling talks stall
• Economists predict a 5.5% YoY increase in US consumer prices
• Money markets price in Fed rate cuts as banking sector instability increases

USD/JPY Overview

On Wednesday, the Dollar/Yen pair experienced a slight decline as U.S. President Joe Biden and key lawmakers were unable to resolve the ongoing deadlock surrounding the debt ceiling crisis. However, the market was subdued due to caution ahead of the release of U.S. consumer inflation data later in the day.

As of 08:21 GMT, the USD/JPY is currently trading at $135.163, marking a decrease of $0.058 or -0.04%. On Tuesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $68.87, showing a decline of $0.07 or -0.10%.

Debt Limit Talks Deadlock Persists

Despite holding talks on Tuesday, President Biden and House of Representatives Speaker Kevin McCarthy have failed to reach an agreement on raising the U.S. debt limit, which currently stands at $31.4 trillion. With the looming threat of an unprecedented default, there is a sense of urgency to resolve this issue. While they remain divided, the two have committed their aides to daily talks and plan to meet again on Friday along with the three other top congressional leaders.

US inflation Challenges Federal Reserve

According to a poll conducted by Reuters, economists anticipate a 5.5% year-on-year increase in core consumer prices in the United States for the month of April.

If the actual reading surpasses this projection, it could pose a challenge for the Federal Reserve. The Fed had just signaled a potential pause in its aggressive tightening cycle after implementing 10 consecutive rate hikes since March 2022.

While the Fed is unlikely to react to moderate inflation, it would require a re-acceleration of inflation to tighten policy further, given that it has already raised rates by 500 basis points and expects some tightening from regional banks.

Money markets are pricing in an approximately 80% chance of the Fed keeping rates unchanged at its next meeting in June, with rate cuts anticipated from July until the year’s end.

Recent banking sector turbulence following the collapse of Silicon Valley Bank in March has fueled the expectation that the Fed will begin cutting rates later in the year.

BOJ Discusses Exit from Policy

On Wednesday, Bank of Japan (BOJ) Governor Kazuo Ueda announced that the central bank will discuss an exit strategy from its ultra-loose monetary policy and inform the public when there is a stable and sustained attainment of its inflation target. This development did not come as a shock to traders, as many had already anticipated that the Bank of Japan would take action in this regard.

Technical Analysis

The USD/JPY is currently trading slightly above the daily technical pivot point of $134.518. The main trend remains upward, but short-term momentum is down. Trader reaction to the pivot will determine the near-term direction.

A return of buyers could push the price above $137.913, retesting last week’s high, and possibly reaching resistance (R1) at $138.452. Conversely, a pivot failure may lead to weakness and a possible decline to the nearest support (S1) at $132.471.

Overall, the direction of USD/JPY is dependent on how traders respond to the pivot at $134.518, with potential for either further upward momentum or downside weakness. Fundamentally, the reaction to the U.S. consumer inflation report will set the tone.

Resistance & Support Levels