USD/JPY signal: forecast ahead of US inflation data, BoJ, and Fed decisions

The Japanese yen has soared in the past few weeks, and is now hovering near its highest level since February this year. The USD/JPY pair has dropped to 154.17, down sharply from the year-to-date high of 163.96. Focus now shifts to some notable macro numbers and the upcoming monetary policy decisions by the Federal Reserve and Bank of Japan (BoJ).

US consumer inflation data and rising bond yields

The USD/JPY pair will be in the spotlight today as investors react to several important events. One of them is that the US will release the August consumer price index (CPI), which will provide hints on what to expect. 

There are signs that the Bureau of Labor Statistics (BLS) will publish a strong consumer inflation report. A report on Thursday showed that the headline Producer Price Index (PPI) rose from 0.1% in July to 0.4% in August, while core PPI fell rose 0.2% on a monthly basis. The two numbers came in at 5.4% and 4.6%, respectively. The annual numbers remain above the Federal Reserve’s target of 2.0%. 

Economists expect the upcoming numbers to show that the headline CPI rose by 3.4% last month, with the core CPI falling to 2.4%. Worse, there are signs that inflation will continue rising now that gasoline and diesel prices have continued rising. 

The average gasoline price in the US jumped to $4.27, while diesel crossed the important milestone of $6. This is notable because these benchmarks were trading at $3.19 and $3.7, respectively last year. 

Oil prices continued rising this week as the US and Iran attacks continued. Worse, Houthis have already taken a major port city and are advancing towards the Bab el-Mandeb Strait. Also, Trump has said that he expects the war will end after the election and there are now no talks going on between the two sides. 

These developments mean that the Federal Reserve will need to hike interest rates as soon as next week.

Bank of Japan rate hike

The USD/JPY pair has also crashed as traders wait for next week’s Bank of Japan interest rate decision. Economists are unanimous that the bank will decide to hike interest rates by 25 basis points in this meeting. 

A BoJ rate hike would help to bridge the gap between interest rates in the US and Japan, which, in theory, should invalidate the carry trade opportunity. This view, however, would not be effective if the US hikes rates as well as the spread remains the same.

USD/JPY technical analysis

USDJPY chart | Source: TradingView

The daily chart shows that the USD/JPY pair has slumped in the past few months, moving from a high of 163.97 to the current 154.26. It has remained below the important support level of 155.21, its lowest level in May and August this year.

The pair has moved below the 38.2% Fibonacci Retracement level. Also, it has dropped below the 50-day and 100-day Exponential Moving Averages (EMA). The pair will likely continue falling, potentially to the 50% Fibonacci Retracement level at 152.