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USD/JPY Tumbles on US Inflation Data

USD/JPY Tumbles on US Inflation Data

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USD/JPY spiked lower on Wednesday after the US Consumer Price Index (CPI) data came in below expectations, sparking a wave of dollar selling.

The headline CPI rose 8.5 percent year on year in July, remaining unchanged from the previous month. Both data points were much lower than forecast. A survey conducted by Bloomberg revealed economists anticipated 8.7 percent and 0.2 percent respectively.

Risk assets jumped following the report, sending US equities back into a bull market. However, the US dollar fared much worse, falling more than 1 percent against a basket of major trading pairs. The dollar weakness was driven by falling bond yields as the market prices a less hawkish Federal Reserve.

Matthew Luzetti, Chief economist at Deutsche bank said, “Equities are taking it certainly positively with the hope that the Fed may need to be less aggressive in their rate hiking cycle,”

The odds of a 75-basis-point hike at the next federal Open Market Committee (FOMC) fell dramatically following the report. As a result, the Yen had its second-best day against the US dollar in over two years.

At one stage, USD/JPY was down 2.25 percent from the previous day. However, a late-day bounce pared the decline to -1.70 percent. The gains have continued this morning. At the time of writing the pair is higher by 0.30 percent at 133.27. As a result, the technical outlook is unclear.

US Dollar to Japanese Yen Outlook

The daily price chart shows USD/JPY fell sharply from the 50-Day Moving Average (DMA) at 135.25 (green line) in yesterday’s session. Notably, the sell-off reversed as the rate approached the longer-term 100 DMA at 131.20 (blue line). With this in mind, the aforementioned DMAs should continue to provide price resistance and support, respectively.

If USD/JPY clears the 50-DMA, we can expect to see momentum buying. In this event, a return to the 138.00 areas is likely. On the other hand, a break below the 100-DMA could trigger more selling, driving the rate lower into the 126.00 to 128.00 trading range.

The dollar has attracted significant capital from weaker currencies this year. Subsequently, if the bearish scenario plays out, the Yen could rise more as institutional traders send money to Japan to take advantage of the stronger currency.

USD/JPY Price Chart

Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.