Greenback Rally to Face Slowing US Inflation

Japanese Yen Speaking Factors

USD/JPY has reversed course after taking out the July low (109.06) amid a restoration in longer-dated US Treasury yields, however recent information prints popping out of the US might rattle the latest advance within the alternate charge as inflation is anticipated to gradual for the primary time in 2021.

USD/JPY Outlook: Greenback Rally to Face Slowing US Inflation

USD/JPY trades again above the 50-Day SMA (110.13) because it climbs to a recent month-to-month excessive (110.60), and the alternate charge might stage a bigger restoration forward of the Kansas Metropolis Fed Financial Symposium scheduled for August 26 – 28 as a rising variety of Federal Reserve officers present a larger willingness to change gears.

Nevertheless, the up to date CPI figures might rattle the latest rally in USD/JPY because the headline studying is anticipated to slim to five.3% from 5.4% in June, with the core charge of inflation anticipated to mirror an analogous dynamic because the determine is projected to print at 4.3% in July versus 4.5% the month prior.

In flip, indicators of transitory inflation might drag on US yields because it raises the Federal Open Market Committee’s (FOMC) scope to retain the present course for financial coverage, however a stronger-than-expected CPI might spark an extra advance within the alternate charge, which might gasoline the latest shift in retail sentiment just like the conduct seen earlier this yr.

The IG Consumer Sentiment report exhibits 43.09% of merchants are at present net-long USD/JPY, with the ratio of merchants quick to lengthy standing at 1.32 to 1.

The variety of merchants net-long is 18.12% greater than yesterday and 19.41% decrease from final week, whereas the variety of merchants net-short is 1.29% greater than yesterday and 35.80% greater from final week. The decline in net-long place might be a operate of profit-taking conduct as USD/JPY trades to a recent month-to-month excessive (110.60), whereas the leap in net-short curiosity has fueled the shift in retail sentiment as 50.75% of merchants had been net-long the pair final week.

With that stated, an extra advance in USD/JPY might gasoline the shift in retail sentiment just like the conduct seen earlier this yr, however the replace to the US CPI might rattle the latest rally within the alternate charge as inflation is anticipated to gradual for the primary time in 2021.

USD/JPY Fee Every day Chart

Supply: Buying and selling View

• USD/JPY approached pre-pandemic ranges as a ‘golden cross’ materialized in March, with a bull flag formation unfolding throughout the identical interval because the alternate charge traded to a recent yearly excessive (110.97).
• The Relative Energy Index (RSI) confirmed an analogous dynamic because the indicator climbed above 70 for the first time since February 2020, however the pullback from overbought territory has undermined the upward pattern from this yr, which briefly pushed USD/JPY under the 50-Day SMA (110.13) for the primary time since January.
• However, USD/JPY reversed forward of the March low (106.37) to largely negate the specter of a head-and shoulders formation, with the alternate charge climbing again above the shifting common to commerce to a recent yearly excessive (111.12) in June.
• An analogous situation took form in July as USD/JPY traded to a recent yearly excessive (111.66), however lack of momentum to carry above the 109.40 (50% retracement) to 110.00 (78.6% enlargement) area in the endled to a break of the July low (109.06).
• Since then, USD/JPY has reversed course amid the failed try to check the Fibonacci overlap round 108.00 (23.6% enlargement) to 108.40 (100% enlargement), with the alternate charge climbing again above the 109.40 (50% retracement) to 110.00 (78.6% enlargement) area because it trades to a recent month-to-month excessive (110.60).
• Want a break/shut above the overlap round 111.10 (61.8% enlargement) to 111.60 (38.2% retracement) to open up the 112.40 (61.8% enlargement) 112.80 (38.2% enlargement) area.

— Written by David Tune, Foreign money Strategist

Observe me on Twitter at @DavidJSong