US CPI preview and what it means for USDJPY

However, hopes were dashed as the report showed the US economy added 559k jobs in May, below market expectations of 674k.

It also showed a decline in participation to 61.6%, a rise in earnings, and a long work week that did little to clear up the questions of labour supply factors raised after a weak jobs report in April.

This has removed some of the pressure from the Federal Reserve to move earlier to taper, although it doesn’t change the view that the Fed will soon begin the conversation around tapering, possibly as early as its upcoming meeting in mid-June.

Asset markets have opted to take the half glass full view that rates will stay lower for longer, perhaps also reassured that tapering isn’t tightening. After the Fed began to taper in December 2013 it wasn’t until two years later that the Fed raised rates in December 2015.

Buoyed by this, US yields eased lower towards range lows, taking the US dollar index, the DXY with it, and propelling gold over 1% higher, towards $1890.

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Technically, after consolidating its breakout of the top of the 11-month trend channel over the past three weeks, the expectation in the medium term is for gold to continue its rally towards the next upside target at $1960 and beyond that the $2075 high from August 2020.

For short-term traders, the preference is to lean against the trendline support currently at $1855 drawn from the 30th of March $1677 low , to enter longs in expectation of a retest and break of last week’s $1916 high, before the $1960 level mentioned above.

Aware that a daily close below $1855/40 would be a setback to the positive bias.

However, after last month’s CPI report surprised with the highest month on month rise in core prices since the 1980s, the bar for a strong reaction this month has been set much higher and as such a more tame reaction is likely this time around.

Supporting the idea of a less volatile reaction, there appears to be growing acceptance of the Feds view that the current rise in inflation is transitory and a recognition that the Fed is focused on the labour market ahead of inflation.

As such, a strong inflation number on Thursday night is unlikely to bring forward the Feds timetable to commence tapering. Although it may prompt the Fed to start its evitable discussion on tapering at the June FOMC, along with an attempt to separate timelines for tapering and rate hikes.

For the record the market is expecting to see a further acceleration to 4.6% y/y in headline inflation with core inflation rising to 3.4% y/y as the deflationary effects from a year ago drop out, and the impact of higher commodity prices, supply bottlenecks and pent up demand following the reopening continue to impact.

In line with this, while the US dollar might find some temporary support following the release of the number the more attractive opportunity may be found in shorting USD/JPY if it breaks/closes below trendline support coming in near 109.00, following the release of the CPI data.

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This would provide an initial indication a decline towards the April low at 107.47 is underway with some risks of a deeper pullback towards wave equality and the 200day moving average coming in between 106.90 and 106.30ish. A move that would bring USDJPY back in line with US 10 year yields.

The figures stated are as of the 7th of June 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation