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USD/JPY Breakout Hinges on Sticky U.S. Inflation, Upbeat Fed

USD/JPY Breakout Hinges on Sticky U.S. Inflation, Upbeat Fed

David Song, Strategist
USD/JPY Breakout Hinges on Sticky U.S. Inflation, Upbeat FedUSD/JPY Breakout Hinges on Sticky U.S. Inflation, Upbeat Fed

Fundamental Forecast for Yen:Neutral

The range-bound price action in USD/JPY may persist next week as the Bank of Japan (BoJ) continues to endorse a wait-and-see approach, but the fresh developments coming out of the world’s largest economy may trigger a topside break in the exchange rate should the data prints boost bets for a 2015 Fed rate hike.

Even though BoJ Governor Haruhiko Kuroda remains upbeat on the Japanese economy, the Cabinet Office Economic report may fuel expectations for additional monetary support as government officials call for another JPY 10T expansion in the asset-purchase program. With lingering expectations for a surprise move at the October 30 interest rate decision, increased pressure on the BoJ to further embark on its easing cycle may continue to foster a long-term bullish outlook for the dollar-yen amid the deviating paths for policy.

In contrast, with U.S. Retail Sales projected to increase another 0.2% in September, an uptick in the core Producer Price Index (PPI) accompanied by a sticky print for the core Consumer Price Index (CPI) may keep the Fed on course to normalize monetary policy later this year especially as Chair Janet Yellen argues that the disinflationary environment remains largely driven by ‘transitory’ factors. In turn, the Fed’s Beige Book may highlight an improved outlook across the 12-disctricts as the central bank continues to look for a stronger recovery, but the fresh comments from Fed officials may have a limited impact in shaping the outlook for monetary policy as the central bank remains ‘data dependent.’ Nevertheless, key speeches by Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans, Fed Governor Lael Brainard, St. Lois Fed President James Bullard, New York Fed President William Dudley and Cleveland Fed President Loretta Mester are likely to be in focus as market participants continue to gauge the Fed liftoff.

As a result, a slew of positive U.S. data prints paired with a batch of hawkish Fed rhetoric may boost the appeal of the greenback and threaten the range-bound price action in USD/JPY as it boost interest rate expectations. Meanwhile, the developments coming out of Japan may encourage bets for a more BoJ easing as the central bank keeps the door open to further insulate the economy.

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