USD/JPY Analysis

• Light economic calendar looks to US CPI for direction, Tokyo CPI cools threat of BoJ policy change
• USD/JPY at major decision point ahead of US CPI – cluster of support halts selling for now
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

It is a rather calm week in the FX space as can be expected for this time of year and given the relatively low amount of high impact economic data, apart from US CPI and UK GDP while you can throw in the start of the US earnings season to the mix as well.

Speaking of economic data, inflation figures for Tokyo suggested that inflation in the capital is struggling to make progress as it has broadly been in decline for some months already. All items less fresh food (core CPI) and all items less fresh food and fuel (core core) declined to 2.1% and 3.5%, respectively.

The Bank of Japan (BoJ) is in the process of assessing the urgency around a pivotal policy shift (hiking rates into positive territory) to combat persistently high inflation – something that cannot be confirmed yet. Price data in Tokyo helps to inform wider national measures as Tokyo accounts for around 20% of Japanese GDP and forms an integral part of the economy.

While national CPI has breached the 2% target for over a year now, the BoJ is yet to be convinced that price pressures will persist above target but is also looking for compelling evidence that the inflation profile has shifted away from a ‘cost push’ issue, towards a ‘demand pull’ phenomenon. Persistently rising wage growth is also imperative if the BoJ is to reverse accommodative policy.

Tokyo’s Core Inflation Slows Further (yellow/gold line)

Source: LSEG, prepared by Richard Snow

USD/JPY at Major Decision Point Ahead of US CPI

USD/JPY turned higher after reaching the late December swing low but momentum was culled last Friday after the ISM services PMI report revealed a sharp drop in the composite measure as well as the employment component of the report. Admittedly, the drop can be attributed to fewer hires and less so to increased layoffs, but the lower reading speaks to a labour market that is easing, while remaining resilient overall.

Today, the pair is slightly softer and tests an immediate cluster of support which is comprised of the 200 simple moving average (SMA) and channel support. Both markers overlap at the 143.35 level. The threat of a BoJ policy change has cooled during the early days of 2024 after an earthquake hit the island.

Channel support could offer clues about future price action should it hold past Thursday when the US is scheduled to post core and headline inflation figures for December. A lower core print is anticipated while headline CPI is expected to hold flat with any surprised to the downside likely to see that cluster of support come under pressure.

USD/JPY Daily Chart at Major Decision Point

Source: TradingView, prepared by Richard Snow

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https://www.dailyfx.com/news/usd-jpy-price-outlook-the-pair-faces-major-support-cluster-pre-cpi-20240109.html