Japanese Yen Gains, USD/JPY Falls After US CPI. Focus Shifts to BoE Next

Japanese Yen, USD/JPY, US CPI, BoE – Briefing:

Japanese Yen gains as markets punish Treasury yieldsUS headline CPI surprised lower, but core remains stickyUSD/JPY turns to BoE rate decision, Ascending Triangle

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Japanese Yen Gains in the Aftermath of US CPI Data

The Japanese Yen was easily the best-performing major currency over the past 24 hours, with USD/JPY sinking about 0.7%. That was the worst day for the pair in one week. Let us take a closer look at what happened.

All eyes were on the latest US CPI report on Wednesday. The headline inflation gauge clocked in at 4.9% y/y in April, slightly lower than the 5.0% median consensus. While that would be a welcoming sign for the Federal Reserve, the core gauge, which excludes volatile food and energy prices, printed 5.5% y/y, in line with expectations. That was down slightly from 5.6% in March.

For two months in a row, core price pressures remained above headline rates of inflation. This suggests that underlying price pressures remain sticky. At the end of the day, markets cautiously increased expectations of rate cuts from the Federal Reserve later this year. As a result, we saw declines in Treasury yields across the maturity spectrum.

This is where the Japanese Yen comes into focus. A static Bank of Japan that is keeping monetary policy ultra-loose (with little signs of changing course) means that JPY will almost always be primarily influenced by external developments. If other central banks are expected to turn dovish from hawkish, in this case, the Fed, then JPY could take advantage of the anticipated decline in competing cash returns abroad.

With that in mind, the next key event risk for the Japanese Yen will likely be the Bank of England monetary policy announcement, due at 11 GMT on Thursday. A rate hike to 4.5% from 4.25% is anticipated. But, what is going to be more important is the forward guidance. Unlike the Fed, more rate hikes are being priced in from the BoE later this year, with a pivot to cutting in early 2024 seen. If yields in the UK fall because of this, then the Yen may continue its rise.

Japanese Yen Technical Analysis

On the daily chart, it seems USD/JPY has been slowly carving out an Ascending Triangle chart formation since the end of last year. Recently, prices turned lower off the ceiling around 138.17. Further losses would place the focus on the rising floor of the chart formation. Until a breakout is achieved, the near-term technical outlook may remain neutral.

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USD/JPY Daily Chart

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— Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

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