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USD/JPY to Take Cues From Japan 2Q GDP, U.S. CPI Report

Fundamental Forecast for Yen: Neutral

The fundamental developments due out next week may spur a near-term advance in USD/JPY as Japan’s 2Q Gross Domestic Product (GDP) report is anticipated to show a contracting 0.5% in the growth rate, while the U.S. Consumer Price Index (CPI) is expected to highlight sticky price growth in the world’s largest economy.

Indeed, fears of a protracted recovery may put increased pressure on the Bank of Japan (BoE) to further expand its quantitative & qualitative easing program (QQE), and Governor Haruhiko Kuroda may sound more cautious over the coming months especially as the renewed weakness in energy prices undermines the central bank’s pledge to achieve the 2% inflation target by fiscal year 2016. At the same time, China’s devaluation process may also nudge the BoJ to implement additional monetary support as it dampens the outlook for Japan’s trade balance, but a further delay of the Federal Reserve’s normalization cycle may keep the Governor Kuroda and Co. on the sidelines throughout 2015 as board member Takahide Kiuchi dissents against the majority and pushes to reduce the monetary base target to JPY 45T from the current JPY 80T.

With only so much time remaining ahead of the Fed’s September 17 interest rate decision, the CPI report may boosts U.S. interest rate expectations as the headline reading is projected to increase an annualized 0.2% in July following the 0.1% expansion the month prior, while the core rate of inflation is expected to hold steady at 1.8% for the second-consecutive month. However, like the BoJ, weak oil prices may also become a growing concern for the Fed as it drags on the inflation outlook, and the committee may continue to endorse a wait-and-see approach as Chair Janet Yellen remains in no rush to remove the zero-interest rate policy.

Even though the long-term outlook for USD/JPY remains bullish amid the policy divergence, the fresh developments coming out in the days ahead is likely to produce increased volatility as market participants continue to gauge the timing of the Fed’s liftoff, while the BoJ keeps the door open to further embark on its easing cycle. With that said, we’ll continue to watch 123.80 (50% expansion) for near-term support, while resistance stands around 125.80 (61.8% expansion) to 125.84 (2015 high). - DS