US Dollar outlook: CPI Curve Reaction Could Drive USD/JPY and USD/CHF

• Fed focused on labor market, not inflation
• Back-end Treasuries likely to lead post-inflation data reaction
• Relative yield curve shifts often drive USD/JPY and USD/CHF
• Technicals: USD/JPY bullish, USD/CHF neutral

Summary

Friday’s U.S. inflation report may not sway the Fed’s near-term decisions, but its implications for the long end of the Treasury curve—and by extension FX markets—are far from trivial. A steepening curve could lift USD/JPY and USD/CHF, while a flattening move may weigh on them. With technical setups favoring near-term upside for USD/JPY and mixed signals for USD/CHF, traders should watch both the data and curve reaction closely.

Inflation Report not a Nothingburger

It’s widely accepted that Friday’s U.S. inflation report is unlikely to alter the outlook for the Fed funds rate over the remainder of the year, with the message from FOMC officials received loud and clear that it’s the labor market driving policy right now, not inflation. As such, many traders and analysts have written it off as irrelevant in the absence of a major left- or right-tail print.

Source: TradingView

While I agree the report has little relevance for what the Fed may do next week or even in December, where two rate cuts remain close to fully priced, I expect the report will be influential on the longer-term outlook for policy rates. That’s exactly what happened in 2024, where it was the back end of the U.S. Treasury curve that staged a significant bearish reversal when it became obvious that rapid and large-scale easing was not required given ongoing resilience in the U.S. economy. That steepened the U.S. Treasury curve, sending longer-dated yields and the U.S. dollar sharply higher as traders made it clear to the Fed that they collectively thought cutting was a policy error.

When it comes to today’s inflation report, longer-dated Treasuries are again where the largest yield movements may be found as traders give their verdict on what the report means for the longer-term outlook for growth and inflation. Details of what economists expect from the key figures are shown below. A preview of what to look for within the report can be found in separate analysis here.

Source: TradingView

When it comes to the likely Treasury curve reaction, a hotter-than-expected print—especially among services categories—may result in a bear steepening, lifting longer-dated yields more than others. Alternatively, a soft print may deliver a bull flattening, with longer-dated yields falling more than shorter-dated. That’s the simplistic playbook without having access to the report yet.

Relative Growth Outlooks Influence FX Markets

Some of you are no doubt wondering why you’re reading this given it’s focused on bonds, which few directly trade. Well, here’s the kicker for FX traders: when it comes to the shape of sovereign yield curves, which provide broader context on expectations for nominal economic growth in the future, they have a reasonable relationship to moves in the dollar against other major currencies, including the Japanese yen and Swiss franc.

That’s shown in the next chart that tracks the correlation coefficient between the shape of the U.S. Treasury curve between two and ten years minus the shape of the twos-tens curve in Japan and Switzerland against moves in USD/JPY (LHS) and USD/CHF (RHS). From top to bottom, it shows the correlation over the past week, fortnight, month and quarter.

Source: TradingView

In essence, what this is measuring is shifts in relative nominal economic growth expectations for the United States compared to Japan and Switzerland. Based on the scores over most time periods, there is some relationship with FX, demonstrating a far stronger correlation than movements in outright U.S. Treasury yields or yield differentials over the same periods.

Should that remain the case, a steepening of the U.S. curve following the inflation report may lift USD/JPY and USD/CHF, with the opposite true if we see a flatter curve.

USD/JPY Eyes October Highs

Source: TradingView

Upside risks flagged in our weekly outlook earlier this week have materialised nicely for USD/JPY, with the pair breaking above 151.00 resistance before extending the bullish move back towards the October 10 high of 15.28. They are the two immediate levels for traders to watch, along with 151.50 where the price has done a little bit of work either side over the course of October.

With momentum indicators firmly bullish, upside is favored in the near-term. RSI (14) is trending higher above 50 but it not yet overbought. MACD has confirmed the bullish signal, crossing over the signal line from below above zero before resuming its push higher. Upside pressure is building.

Should the pair manage to break and hold above 153.28, traders may target a retest of resistance at 154.80. Should 153.28 hold, 151.50, 151.00,149.41 and 149.00 are support levels of note.

USD/CHF Impacted by Geopolitics

Source: TradingView

The technical picture for USD/CHF looks quite different compared to USD/JPY despite it’s relatively tight relationship with shifts in relative growth differentials, likely reflecting recent geopolitical events involving Russia. Still, one look at the daily chart shows the pair remains respectful of known levels.

On Thursday, the rejection at the 50-day moving average ultimately delivered a shooting star candle, warning of potential downside risks ahead. The move has seen the pair move back to support at .7950, where it currently resides. With momentum indicators providing a neutral signal even if they marginally favour downside, more emphasis should be put on price action and signals in the current environment.

Should we see a break of .7950, .7912 is another nearby support level, with the October 17 low of .7875 and September 17 low of .7830 other levels of note. Above the 50-day moving average, .8000, June downtrend around .8040 and resistance at .8071 should be on the radar should we see a bounce.