USD/JPY Return to sub-138.50 Hinged on US CPI Report

It is a quiet start to a big day for the USD/JPY. This morning, economic indicators from Japan failed to move the dial as investors turned their immediate attention to the US CPI Report.

The BSI Large Manufacturing Conditions Index increased from -10.5 to -0.4 in Q2 versus a forecasted -4.2. While the improvement in manufacturing sector conditions was bullish, investors remained focused on the Fed and Bank of Japan’s monetary policy decisions.

As things stand, monetary policy divergence remains in favor of the dollar. While the bets on a June Fed interest rate hike have eased, the chances of a 50-basis point July hike have increased. In contrast, the Bank of Japan continues to beat the ultra-loose monetary policy drum.

USD/JPY Price Action

This morning, the USD/JPY was down 0.10% to 139.462. A choppy start to the day saw the USD/JPY fall to an early low of 139.399 before rising to a high of 139.664.

Technical Indicators

Resistance & Support Levels

The USD/JPY needs to move through the 139.476 pivot to target the First Major Resistance Level (R1) at 139.889. A move through the Monday high of 139.764 would signal a bullish USD/JPY session. However, the US CPI Report must support a USD/JPY breakout.

In case of an extended rally, the bulls would likely test the Second Major Resistance Level (R2) at 140.177 and resistance at 140.5. The Third Major Resistance Level (R3) sits at 140.878.

A fall through the pivot would bring the First Major Support Level (S1) at 139.188 into play. However, barring a US CPI Report-fueled sell-off, the USD/JPY pair should avoid sub-138.5. The Second Major Support Level (S2) at 138.775 should limit the downside. The Third Major Support Level (S3) sits at 138.074.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The USD/JPY sat above the 50-day EMA (139.450). The 50-day pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A USD/JPY hold above the 50-day EMA (139.450) would support a breakout from R1 (139.889) to target R2 (140.177) and 140.5. However, a fall through the 50-day EMA (139.450) would bring S1 (139.188) and the 100-day EMA (138.998) into view. A USD/JPY fall through the 50-day EMA would send a bearish signal.

The US Session

Eying the US session, the all-important US CPI Report is in focus.

The US CPI Report will be the main report of the day. Hotter-than-expected US inflation numbers would tip the monetary policy divergence scales further in favor of the Greenback.

However, economists forecast the US annual inflation rate to soften from 4.9% to 4.1%, supporting a Fed pause on Wednesday.

The probability of a June rate hike fell from 29.9% to 18.5% this morning, according to the CME FedWatch Tool. However, the chance of a 25-basis point July Fed rate hike increased from 52.8% to 59.1%. Significantly, bets on a 50-basis point July interest rate hike fell from 17.1% to 11.9%.