USD/JPY Forecast: Traders on Edge as US CPI Report Approaches

USD/JPY Highlights

• USD/JPY trading flat as investors await US CPI report
• BOJ Governor announces plan to end of yield curve control policy
• Japan’s consumer spending drops unexpectedly, challenging post-COVID recovery

USD/JPY Overview

On Tuesday, the Dollar/Yen is nearly unchanged as traders exercised caution ahead of the US consumer inflation report, scheduled for release on Wednesday.

As of 09:02 GMT, the USD/JPY is trading at $135.052, down $0.014 or -0.01%, while the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.94, down $0.17 or -0.25% on Monday.

Traders Anticipate Release of US CPI Report

The upcoming report on the US consumer price index in April, which is expected to show a year-over-year rise of 5% and a month-over-month gain of 0.4%, will be closely scrutinized by investors for any clues on future Federal Reserve policy moves. According to the CME Group’s FedWatch tool, traders are currently pricing in only a 13.1% chance of another 25 basis-point rate hike next month.

BOJ to End Yield Curve Control Policy Once Inflation Targets are Met

Bank of Japan Governor Kazuo Ueda has announced that the central bank will end its yield curve control policy and shrink its balance sheet once inflation sustainably reaches its 2% target.

He stated that Japan’s economy is showing positive signs, with inflation expectations remaining high. However, he warned of uncertainties in the outlook. Under yield curve control, the BOJ sets a short-term interest rate target of -0.1% and caps the 10-year bond yield around zero.

The BOJ also announced a plan to review its past monetary policy moves and conduct workshops with private academics to analyze the benefits and side effects of past monetary policies.

Japan’s Consumer Spending Falls Unexpectedly

Japan’s consumer spending fell unexpectedly in March, marking the largest decline in a year. This is in contrast to twelve consecutive months of declining real wages and highlights the challenges facing Japan’s post-COVID recovery.

The data point to uncertainties surrounding the Bank of Japan’s policy outlook amid financial sector worries and slowing global growth, despite expectations of phasing out ultra-easy monetary settings.

Despite eased COVID-19 restrictions on domestic shoppers and international travelers, rising prices have limited Japan’s consumption-led recovery from the pandemic. The outlook for monetary policy normalization under the new BOJ Governor Kazuo Ueda depends on whether the trend of wage hikes in large firms spreads to smaller businesses.

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, with potential for either further upward momentum or downside weakness.

Resistance & Support Levels