USD/JPY forecast: bearish flag forms ahead of US inflation data

By: Crispus Nyaga
Crispus Nyaga
Crispus is a Financial Analyst for Invezz covering the stock, cryptocurrency and forex markets. He’s an experienced analyst with… read more.
on Nov 10, 2021
  • The USD/JPY pair declined sharply this month.
  • The decline happened as the divergence between the Fed and BOJ widened.
  • The pair will next react to the latest US inflation data.

The USD/JPY price is in a tight range as investors wait for the upcoming American consumer inflation data. The pair declined to a low of 112.83, which is the lowest it has been since October 11. It has dropped by more than 1.57% below the highest level in October.

US inflation data ahead

The USD/JPY has struggled in the past few days. The weakness started after last week’s Federal Reserve interest rate decision. The Fed decided to start tapering its asset purchases.

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It then accelerated after the US published strong October jobs numbers. The numbers showed that the economy added more than 500k jobs in October while the unemployment rate declined.

The next key catalyst for the USD/JPY pair will be the upcoming US inflation data. These numbers will provide more hints about what the Fed will do.

Analysts expect that the American consumer price index (CPI) rose to a 31-year high of 5.8% as energy prices surged. They also expect that the core CPI rose to 4.3% in October.

On Tuesday, data by the statistics bureau showed that the American producer price index (PPI) rose by 8.6% in October. Core PPI rose by 6.8%. These numbers were relatively lower than estimates.

Stronger than expected US inflation numbers will signal that the Fed will move on with its tightening phase. As such, the gap between the Federal Reserve and the Bank of Japan will widen further. The BOJ has maintained its dovish policy stance.

On Tuesday, data from Japan showed that the country’s overtime pay declined from 6% in August to 4.40% in September. In the same period, the average cash earnings slowed from 0.6% to 0.2%.

USD/JPY forecast

USD/JPY

The four-hour chart shows that the USD/JPY pair has been in a major bearish trend lately. Along the way, the pair has moved below the 23.6% Fibonacci retracement level. It also moved below the lower side of the descending channel shown in green.

The USDJPY pair has also moved below the 25-day moving average while the MACD indicator has been in a downward trend. It also seems to be forming a bearish flag pattern.

Therefore, the pair will likely break out lower in the coming days. If this happens, the next key support level will be the 50% retracement at 111.88.

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