Yesterday, we provided guidance on potential volatility in the USDJPY pair that we felt could occur at the end of the week, providing the possibility for a reversal in the pair, which had been trending higher. Our directional bias we shared was for a softer than expected CPI number which could spur a key reversal in the USDJPY pair, which had seen a considerable amount of bullish momentum as of late. We saw potential for a move off of near term highs down through the 112’s, with a move under 112.75 potentially in play.
It was an unconventional period in that interest rate speculation dominated the conversation most of the week, heading into a key CPI data release this morning. The CPI print came in under expectations, and the markets were quick to respond. According to the US Government, the CPI was unchanged from last month, and the 12 month rate slowed to 1.6%, primarily driven by lower energy and grocery prices. CPI is seen as a key driver of forward interest rate expectations in the domestic US, which is highly influential in the value of the dollar.
As we also shared, 10 year yields are highly correlated with USDJPY as of late, and yields are down sharply on the morning’s news. Traders in this pair could continue to monitor 10 year yields for potential guidance on price action in this pair.
But the focus is on inflation. The CPI print came in under expectations, and the markets were quick to respond. The government said the CPI was unchanged from last month, and the 12 month rate slowed to 1.6%, primarily driven by lower energy and grocery prices.
Here is the 3 year CPI trend that disappointed markets and dollar bulls:
With the release being under expectations, and with a slightly dovish tilt observed by the markets in Yellen’s testimony from earlier this week, this was all the confirmation dollar bears needed to move against the greenback. Here is a look at USDJPY following the release:
Traders should be aware we could see sharp moves with higher volatility on the potential for thinner volume on a Friday afternoon in the summer in the US session. This puts the pair in a channel well under 112.75 and possibly brings the 112.25 level in play, as we expected yesterday, and it is a move binary trader could still consider as part of a strategy to close out the week.