- USDJPY awaits CPI release from the United States to define the next trajectory.
- The economic impact of Covid-19 is still the key determinant of JPY strength.
- Fed tapering could be more likely with CPI data above expectations
USD/JPY opened Wednesday’s early Asian trading session on a strong note, building on Tuesday’s gains to grow 0.16%, reaching 110.737 at 0636 GMT. The US dollar is up against major currencies, supported by strong jobs data and anticipated tapering by the Fed in September.
Fed spending in focus as the market awaits US CPI data
At the time of writing, the US dollar index, DXY, which tracks the USD’s performance against six currency majors, was above 93.00. The DXY has gained about 1% over the past month, and this has been underpinned by the dollar’s consistent rise over JPY in the past seven days. With the strong USD, the 10-year US Treasury yields have risen by 1.36% as the market awaits an end to the Fed’s spending on bonds purchases.
Beyond the Treasury yields, the USDJPY pair will next be waiting for the release of the July Consumer Price Index (CPI) data later in the day on Wednesday. Analysts expect a figure of 0.5% for the July headline CPI and 0.4% for the July core CPI. This will be a decline from 0.9% for both core and headline CPI levels recorded in June.
Generally, a decline in the inflation will give the Fed more confidence in their assessment of the economy, following a perceived hard stance and insistence that the current inflation is transitory.
However, if the July CPI falls below forecasts, then it could put the USD at a disadvantage. This is because it would water down the widespread belief that the Fed will taper its expenditure beginning September.
Therefore, the bulls will be hoping that the CPI data at least meets the projection. If the data exceeds expectations, it could bolster the bulls further because it will increase the probability of FOMC voting for tapering in their next meeting.
JPY battered by Covid-19 as a result of economic slowdown
The Japanese yen has paid the price for rising Covid-19 infections in Japan, which resulted in the locking out of spectators from the just-concluded Olympics in Tokyo and reduced economic activity in the world’s third-largest economy. In addition, Japan experienced the slowest rate of growth in loans issued in nine years in July. This is a strong indicator of a slowdown in economic activity in the country.
On a positive note, Japan’s balance of trade improved significantly in July, registering a much-improved rise of ¥648 billion compared to an earlier ¥2 billion.
Currently, the market is waiting on the release of Japan’s Machine Tool Orders figures for July, due for release on Wednesday. However, that is unlikely to have a significant impact on the USDJPY pair, as the market will certainly pay greater attention to the US CPI data due for release on the same day.
The USDJPY pair is currently riding on strong market momentum, with its RSI at 58 and the indicator line in an upward trajectory. This makes a strong case for bullish control. In that case, the pair is likely to encounter the first resistance at 110.814, and a further push may see it attempt 111.020.
However, if the market adopts a bearish charge, the first support may be established at 110.607 and the second one at 110.044.