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USD/JPY Breaks the June Bullish Trend Despite Continued Inflation Lag

USD/JPY Breaks the June Bullish Trend Despite Continued Inflation Lag

James Stanley, Senior Strategist

Talking Points:

Fundamental Forecast for JPY: Neutral

Want to see how other traders are approaching USD/JPY? Check out our IG Client Sentiment indicator.

USD/JPY Breaks the June Trend

It was a week of pullback for USD/JPY, as the Yen caught a bid in the early portion of the week as risk aversion started to show across global markets. This led to rather concerted drops in pairs like GBP/JPY or EUR/JPY shortly after this week’s open; but support caught in each pair early on Tuesday morning and prices put in a bit of recovery as we moved towards the end of the week. In the major pair of USD/JPY, a prior up-trend was nullified by that Sunday/Monday selling, and USD/JPY broke below a bullish trend-channel that had built in the first half of June. After a recovery, resistance came in from the underside of that channel, leading to a fall back-below the vaulted psychological level of 110.00.

USD/JPY Four-Hour Chart: Break-Below June Bullish Channel, Back-Below 110.00

usd/jpy usdjpy four hour chart

Chart prepared by James Stanley

Japan Inflation Remains Subdued After Earlier-Year Spike

The big data item this week out of Japan was inflation for the month of May, which was released to a slight improvement from last month’s .6% print to come-in at .7%. But – this is still well-below the earlier-year levels of 1.4 and 1.5% that printed during January and February; and this further raises questions around the effectiveness of the BoJ’s current QE policy given the recent inflation slowdown despite the fact that the bank remains near ‘pedal to the floor’ levels of accommodation.

This continued lag in inflation also helps to remove any additional motivation that might be building to look towards a nearby stimulus exit. This can help the currency to continue functioning as an attractive funding vehicle in ‘risk on’ types of market environments; while also making Yen-strength a likely theme during periods of risk aversion, as those ‘carry trade’ bets leave the market for safer harbors.

Japanese Headline CPI Comes in at .7% For the Month of May, 2018

Japan Headline CPI by Month Since January 2017

Chart prepared by James Stanley

Next Week’s Drivers

Next week’s economic calendar out of Japan is rather light, with no high-impact announcements on the docket and a smattering of medium-impact releases set throughout the week. BoJ meeting minutes are released shortly after the Sunday open, and retail trade numbers, industrial production and consumer confidence are released on Wednesday, Thursday and Friday of next week.

DailyFX Economic Calendar: High-Impact JPY Events for Week of June 25, 2018

DailyFX Economic Calendar High-Impact Events for JPY Week of June 25, 2018

Chart prepared by James Stanley

The more pronounced drivers will likely emanate from global risk trends. US equities have seen various forms of bearish price action since last weeks’ FOMC and ECB rate decisions, and this has a tendency to help to produce Yen-strength. If we do see a continuation of risk aversion in key risk markets such as US stocks, that can keep the bid behind the Yen for the near-term. On the other hand, should we see a return of the risk-on trade, Yen weakness may become attractive again under the drive that the BoJ will likely remain as one of the more loose and passive Central Bank’s in the world, as afforded by a continued lag with inflationary pressure.

The forecast for next week will be set to neutral.

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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