Inflation Data Weighs on the Dollar
by Rania Gule, Senior Market Analyst at XS.com – MENA
The USD/JPY pair witnessed a significant drop, starting Thursday’s session around the 155.00 level, near the lower boundary of the short-term descending channel. This decline came after U.S. inflation data showed a slowdown in core inflation, triggering a dollar sell-off and prompting investors to seek refuge in the Japanese yen. This sudden shift reflects the ongoing tensions in financial markets, where economic data has become a key factor in shaping investors’ expectations regarding future monetary policies.
Core inflation in the U.S. showed a slight slowdown, signalling to investors that the Federal Reserve might be approaching the end of its tightening cycle. The monthly increase in the Consumer Price Index (CPI) of 0.2% met expectations, while the annual figure slightly declined to 3.2%. These numbers directly impacted U.S. yields, with the 10-year Treasury yield falling by more than 12 basis points, indicating that markets are anticipating a more dovish path from the Fed.
On the other hand, the Japanese yen took advantage of this opportunity to strengthen, supported by statements from Bank of Japan Governor Kazuo Ueda, who hinted at the possibility of raising interest rates if price conditions and wages continue to improve. In my view, these remarks were not just casual comments but came at a critical time, significantly influencing market expectations regarding the Bank of Japan’s monetary policy. The hint of a potential rate hike suggests a shift in the bank’s long-standing strategy, which has historically relied on monetary easing to support the Japanese economy.
I believe that this divergence between U.S. and Japanese monetary policies enhances the yen’s appeal as a safe-haven asset, especially amid declining U.S. yields and a weakening dollar. Meanwhile, investors remain on edge, awaiting further remarks from Federal Reserve officials as they seek to gauge whether recent data is sufficient to prompt the Fed to change its stance or at least soften its hawkish tone.
Therefore, I think these expectations have sparked optimism in Asian markets, with the yen leading gains among major currencies, while the dollar shows signs of weakness.
In my view, the yen’s recent performance reflects not only the dollar’s weakness but also growing confidence in the Japanese economy. Governor Ueda’s comments on wage growth suggest that the Bank of Japan might see sustainable improvement on the horizon, potentially prompting policy adjustments to support this momentum. In contrast, U.S. markets seem to need clearer signals from the Fed, especially as the release of retail sales and jobless claims data approaches — both of which could reshape market expectations.
I believe the current volatility in the USD/JPY pair reflects global financial market uncertainty, with contrasting outlooks between U.S. inflation and potential monetary tightening in Japan. It is difficult to predict a clear short-term direction for the pair, but what is certain is that economic data and official statements will remain the primary drivers of its movements.
In conclusion, the Japanese yen currently stands out as one of the currencies benefiting the most from the current economic conditions. However, it remains sensitive to any new developments in monetary policy or economic data. Markets are carefully monitoring every word from both Federal Reserve and Bank of Japan officials, as any new signals could reshape the global financial landscape. For this reason, investors should remain vigilant, and ready to adjust their strategies in line with these fast-moving and complex developments.
Technical Analysis of (USDJPY) Prices:
The USD/JPY chart indicates that the overall bullish trend remains intact, but the upward momentum has started to lose strength, with signs of a near-term pullback emerging. The pair is moving within a clearly defined descending channel on the four-hour chart, with consecutive waves forming lower lows after each corrective upward wave, in line with the Elliott Wave pattern. The break below the 157.41 support level triggered a strong sell signal, driving the price toward the next key support at 156.00. If this bearish momentum persists, a test of the 154.94 support level appears likely.
The 100-period Simple Moving Average (SMA-100) shown on the chart has been providing support for the overall uptrend but is currently positioned above the price levels, increasing the likelihood of a further decline toward deeper support levels. If the price manages to break below the 154.94 level, attention will shift to the 50-day Simple Moving Average (SMA-50) at 154.74, which will act as a critical support zone. Any break below this level could push the pair toward the 152.00 level, an important support area that aligns with the fifth wave in the bearish scenario illustrated on the chart.
Based on wave analysis and key technical points, investors are advised to closely monitor any rebound at these support levels, as it may present an opportunity to re-enter the overall bullish trend if buying momentum resumes. However, ongoing statements from central bank officials, such as the Bank of Japan governor or U.S. Federal Reserve officials, will significantly impact the pair’s movements in the coming days.
Support Levels: 156.00 – 154.94 – 154.74
Resistance Levels: 157.41 – 158.00 – 159.00
