The USD/JPY eased lower yesterday with the greenback also declining against several other currencies. However, oil prices managed to bounce back off their lows to close flat and if we now see fresh gains for crude oil then the US dollar could easily make a comeback, especially against currencies where the economy relies heavily on energy imports. 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 later on Wednesday. I maintain a modestly bullish USD/JPY view, as the pair continues to consolidate near its 200-day average. Can we see a bullish breakout today?
US CPI coming up
US inflation will be the main event on the economic calendar today and it may well trigger some short term volatility across the major FX pairs when it is released.
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.
US: dollar remains supported on short-term dips
Ahead of the CPI release, the dollar had eased back but was still maintaining much of its recent gains. It is 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 push towards 160.00 on dollar yen and a rally for the dollar more generally?
USD/JPY technical analysis
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.
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