USD/JPY analysis: A somewhat softer US CPI raises the possibility of a Fed policy pause.

The dollar regains its footing following a decline caused by the CPI.

Following the release of the US CPI, the US dollar initially fell, while stocks and gold rose. However, the tiny gain in headlines was insufficient to produce a total reversal of the trend. As a result, as the dust settled, the dollar received renewed support, with the GBP/USD and EUR/USD giving up large parts of their previous gains, while gold gave up its whole CPI-inspired gains. Overall, CPI has no discernible impact on the dollar’s long-term trend. However, we suspect the dollar has much gas left in the tank. So, keep an eye out for a correction shortly – albeit the USD/JPY is probably not the ideal pair to profit from a potential dollar reversal, given the BoJ’s exceptionally lax policies in comparison to other central banks.

Can US Inflation keep rising?

While US CPI inflation appears to be cooling, there are some signals that it may begin to rise again. Falling energy prices have played a significant role in recent inflationary decreases. However, with WTI oil prices approaching $85, pushing up gasoline prices, CPI may be unable to return to the Fed’s objective, forcing the central bank to continue a restrictive policy for longer. As a result, I believe that energy and wage inflation in the services sector will keep the headline rate high.

However, this will be offset by China exporting disinflation, as consumer prices have fallen into deflationary zone. As a result, the most likely consequence is that price pressures will continue to fall, but at a much slower rate than in recent months. 

The Fed will believe that it has done enough to bring inflation back up to its 2% objective in the medium run. Furthermore, when it comes to the developed economies, global monetary policy is highly restrictive. As a result, I believe inflation will continue to fall over time, and the Fed will begin to loosen its grip next year rather than this year.

As a result, the US dollar may soon resume its downward trajectory, increasing the attraction of some dollar-denominated assets. However, before we turn bearish on the dollar, we need to witness a clear reversal pattern. Until that happens, dollar bears should tread carefully.

UoM surveys up for the show next

There will be one more inflation and jobs report before the Fed’s next meeting in September. Any additional deterioration in the CPI could strengthen expectations of a policy pause. However, the Fed will also keep an eye on other macroeconomic indicators, such as consumer confidence. On Friday, we’ll get the most recent results from the University of Michigan’s Consumer Sentiment and Inflation Expectations surveys.

However, if most of these indications continue to hint to further strength in the US economy, the dollar should be supported on falls against the yen, which continues to fall out of favor due to the BoJ’s prolonged ultra-loose policy stance.

USD/JPY analysis: no change in current trend yet

The USD/JPY is still making new highs. With previous resistance around 143.50 now acting as support, the path of least resistance remains to the upside, with bulls aiming for the June high of 150.00 as their net target. If we break through 145.00, there is a good chance that the BoJ will intervene again. Given that almost all of the indicators on the chart are positive, the bears would like to see a move back below 143.50 as a minimum before considering any bearish trades. Price, for example, remains above the 21-day exponential average, indicating that the near-term trend is objectively optimistic.