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Japanese Yen Talking Points

USD/JPY moves to the beat of its own drum in September, with the exchange rate pulling back ahead of the monthly-high (111.76), and dollar-yen may continue to consolidate ahead of the Federal Reserve interest rate decision on September 26 amid the mixed data prints coming out of the U.S. economy.

Image of daily change for major currencies

USD/JPY Eyes Monthly-Low as US Producer Price Index (PPI) Disappoints

Image of daily change for usdjpy

Updates to the U.S. Producer Price Index (PPI) showed the headline reading increasing 2.8% in August versus forecasts for a 3.2% print, and the lackluster development may push the Federal Open Market Committee (FOMC) to deliver a dovish rate-hike in September as ‘members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee's objectives of maximum employment and 2 percent inflation.

Image of Fed Fund Futures

Even though the FOMC appears to be on course to deliver four rate-hikes in 2018, the central bank may continue to tame expectations for an extended hiking-cycle as Chairman Jerome Powellsees a limited risk for above-target inflation, and Fed officials may continue to project a longer-run interest rate of 2.75% to 3.00% as ‘many participants commented on the fact that measures of aggregate nominal wage growth had so far picked up only modestly.

In turn, the Consumer Price Index (CPI) on tap for tomorrow may foster a similar reaction as the PPI as the headline reading is expected to slow to 2.8% from 2.9% in July, and signs of waning price pressures may keep USD/JPY under pressure as it dampens bets for an extended hiking-cycle. With that said, dollar-yen may continue to consolidate over the remainder of the week, and the exchange rate stands at risk of facing range-bound conditions ahead of the Fed meeting as the recent rebound in the exchange rate fails to produce a test of the monthly-high (111.76).

USD/JPY Daily Chart

Image of usdjpy daily chart
  • The rebound from the monthly-low (110.38) may continue to unravel as USD/JPY fails to break the monthly opening range, with the lack of momentum to hold above the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) raising the risk for a move towards the 109.40 (50% retracement) to 110.00 (78.6% expansion).
  • Need a break/close below the stated region to open up the next downside region of interest around 108.30 (61.8% retracement) to 108.40 (100% expansion), which sits just above the May-low (108.11).

For more in-depth analysis, check out the Q3 Forecast for the Japanese Yen

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.