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FX Week Ahead - Top 5 Events: April US Inflation Report & USD/JPY Rate Forecast

FX Week Ahead - Top 5 Events: April US Inflation Report & USD/JPY Rate Forecast

2020-05-11 14:00:00
Christopher Vecchio, CFA, Senior Strategist
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April US Inflation Report Overview:

  • The April US inflation report (consumer price index) is due out on Tuesday, May 12 at 12:30 GMT, and the data are expected to show a sharp pullback in price pressures.
  • But the drop in inflation isn’t unexpected, given the economic fallout from the coronavirus pandemic and subsequent response by the Federal Reserve.
  • Retail traders are further net-long USD/JPY than yesterday and last week.
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05/12 TUESDAY | 12:30 GMT | USD Consumer Price Index (APR)

The April US inflation report (consumer price index) due on Tuesday is due to show a sharp decline in price pressures, but nothing that should motivate the Federal Reserve to alter its current aggressively dovish policy path in any significant manner.

According to Bloomberg News, headline CPI is expected in at 0.4% from 1.5%, and core CPI is due in at 1.7% from 2.1% (y/y). As fears grow around depression-like economic conditions facing the United States, price pressures have dropped thanks to the sharp pullback in aggregate demand. It’s likely that the next few months of inflation data also show disinflation, if not outright deflation.

But the drop in inflation isn’t unexpected, given the fallout from the coronavirus pandemic. In turn, the Federal Reserve has ballooned its balance sheet north of $6 trillion. The Fed will be keeping the monetary spigot wide open for the foreseeable future, so these inflation data may not have a significant impact.

Crude Oil Price versus US 5y5y Inflation Swap Forward (May 2019 to May 2020) (Chart 1)

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Stability in energy markets, particularly crude oil prices, in recent weeks has catered to an environment defined by stability in inflation expectations – although, those too have taken a hit relative to where they were prior to the coronavirus pandemic. The disparity between the April US inflation report and the medium-term inflation outlook may serve as a reminder that market participants are hopeful that the current economic malaise is not expected to last long-term.

Pairs to Watch: DXY Index, EUR/USD, USD/JPY, Gold

USD/JPY Rate Technical Analysis: Daily Chart (May 2019 to May 2020) (Chart 2)

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USD/JPY rates closed out last week on a high note, but not before setting fresh May lows and the lowest level since the second week of March. A lack of movement in gold prices and US Treasury yields has left the Japanese Yen on a slow, bearish burn versus the US Dollar, but hardly in a convincing fashion.

The momentum profile for USD/JPY rates is conflicted. USD/JPY rates are intertwined among the daily 5-, 8-, 13-, and 21-EMA envelope, which is aligned in neither bearish nor bullish sequential order. Daily MACD continues to glide below its signal line, while Slow Stochastics are holding in oversold territory (although edging higher). More losses may still be in the cards.

IG Client Sentiment Index: USD/JPY Rate Forecast (May 11, 2020) (Chart 3)

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USD/JPY: Retail trader data shows 55.56% of traders are net-long with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 0.79% higher than yesterday and 13.10% higher from last week, while the number of traders net-short is 10.00% lower than yesterday and 11.44% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bearish contrarian trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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