The USD/JPY eased lower today with the greenback also declining against several other currencies. However, at the time of writing, oil prices were bouncing back and yields were off their lows again. The US dollar hadn’t moved much yet, but these forces could help it to regain its poise ahead of the release of US CPI on Wednesday. We maintain a modestly bullish USD/JPY forecast, as the pair continues to consolidate near its 200-day average.
Before discussing the macro factors further, let’s first discus the chart of the USD/JPY…
Technical USD/JPY forecast and key levels to watch
The USD/JPY has been holding just below its 200-day average for several sessions now without any traction on the downside. With the bulls refusing to give up, we could potentially see a sizeable rally in the coming days, if the sellers now lose control here.
Undoubtedly, there will be lots of stops resting above recent highs of around 158.75 to 159.00 area. If we see a run on those stops, then a quick follow-up rally to 160.00 would become highly likely to me.
Support meanwhile comes I around the 158.00 area on an intraday basis. Below that, 157.00 seems to be a congested zone judging by recent wicks of the daily price candles. Thereafter, 156.00 is the next downside level to watch.
All told, the risks remain tilted to the upside for the USD/JPY, despite the slight weakening today.
US CPI in focus
As mentioned, US inflation will be the main event on the macro calendar and it may well trigger some short term volatility across the major FX pairs on Wednesday.
Markets are expecting core CPI to rise 0.2% month-on-month, taking the annual rate to 2.5%.
Headline inflation meanwhile is expected to accelerate to 3.6%.
Given that expectations are already fairly well defined, we may need a meaningful surprise to trigger a stronger dollar move. This, If the numbers come in broadly as expected, the initial reaction could be fairly limited.
USD/JPY forecast: dollar remains supported on short-term dips
Ahead of the CPI release, the dollar was still supported by relatively hawkish expectations for Fed policy, while positioning data continues to show preference for long dollar bets against most major currencies, particularly the euro.
While the long dollar trade looks somewhat crowded, that alone isn’t necessarily a reason to expect a reversal. Could we now see a fresh dollar rally, and another push towards 160.00 on USD/JPY?
