The USD/JPY outlook leans mildly bullish as the yen pulls back following its surge in the previous session. Nevertheless, the overall trend remains downward after the dollar declined due to lower-than-anticipated inflation figures.

The yen surged nearly 3% on Thursday after a downbeat US inflation report. However, there was speculation in the market that Japan had also intervened to strengthen the currency. Some news outlets like Asahi reported that officials had intervened in the market.

On Friday, top currency diplomat Masato Kanda failed to comment on the possible intervention. However, he reminded traders that Japan will take necessary action in the FX market. 

Meanwhile, the dollar fell sharply after inflation dropped for the first time in 4 years. This was a big boost for Fed rate cut expectations. Moreover, it came after Powell said that policymakers needed more evidence inflation was on a downtrend. 

Notably, the Consumer Price Index fell by 0.1% in June. Meanwhile, the annual figure increased by 3.0%, a decline from the previous month’s 3.3% increase. Price pressures eased as gasoline became cheaper. This report should give Fed officials more confidence that inflation is on a downward path and will eventually reach the 2% target.

As a result, market participants raised the likelihood of a Fed cut in September from 73% to 93%. Traders are almost certain the US central bank will start lowering borrowing costs in September. As a result, the dollar lost its appeal, allowing the yen to recover.

USD/JPY key events today

• US core PPI m/m
• US PPI m/m
• Prelim UoM consumer sentiment

USD/JPY technical outlook: Sentiment shifts after sharp spike in bearish momentum

(Click on image to enlarge)

USD/JPY 4-hour chart

On the technical side, the USD/JPY price is bouncing higher after reaching the 158.01 key support level. The price recently made a sharp bearish move that led to a shift in sentiment to bearish. The pair fell below the 30-SMA and the RSI dipped into the oversold region, supporting a bearish bias. 

However, after such a steep move, the price is pulling back before continuing lower. The pullback could retest the 158.01 level and the 30-SMA. If bears hold on to control, the price will breach 158.01 to revisit the 156.01 support. 

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