USD/JPY – Yen Shrugs Off Soft Inflation Data, US GDP Looms

USD/JPY has drifted throughout the week and the trend continues on Friday, as the pair trades at 109.60. On the release front, Japanese Tokyo Core CPI came in at -0.5%, weaker than the estimate of -0.4%. National Core CPI posted a decline of 0.3%, compared to the forecast of -0.4%. The US will release two key indicators – Preliminary GDP and UoM Consumer Sentiment. As well, Fed chair Janet Yellen will deliver remarks at an event in Boston. Traders should be prepared for possible volatility from USD/JPY in the North American session.

April inflation reports out of Japan continue to paint a bleak picture. Tokyo Core CPI, the primary gauge of consumer inflation, dipped to -0.5%, marking a fifth monthly decline. National Core CPI wasn’t much better, posting a decline of 0.3%. The Bank of Japan has had little success in fighting deflation, which has hampered the economy. The yen showed little reaction to the soft inflation numbers. The currency has appreciated about 9% in 2016, hurting the critical export sector. Japan has threatened to intervene if the yen continues to strengthen, but the US has warned Japan against any unilateral moves. This disagreement surfaced at the G-7 meeting of finance ministers, with the US and Japan publicly bickering over whether the yen’s rise has been “disorderly”.

First quarter numbers out of the US have been mixed, so Preliminary GDP, which can be treated viewed as an economic report card, will be closely monitored on Friday. Final GDP for the fourth quarter came in at 0.5%, shy of the estimate of 0.7%. The estimate for Preliminary GDP stands at 0.8%, and if the indicator matches or beats this reading, the US dollar could push upwards. The markets also have strong expectations for the UoM Consumer Sentiment report, with an estimate of 95.7 points. In April, this key consumer confidence indicator dipped to 89.0 points, marking the first reading below the symbolic 90 level since November 2014.

The Fed minutes have renewed speculation that the Fed may press the rate trigger in June, and this has bolstered the US dollar. The minutes were more hawkish than expected, resulting in strong volatility in the currency markets. Odds of a rate hike in June increased to 40% earlier this week, compared to just 4% one week ago. Still, the Fed will be hard-pressed to raise rates if key indicators don’t show improvement, particularly inflation numbers. On Monday, FOMC member John Williams reiterated that he expected the Fed to raise rates two or three times in 2016. However, there appears to be a gap between the hawkish message some FOMC members are sending out and market sentiment, as many analysts are projecting only one rate hike this year. The guessing game as to what the Fed has in mind is likely to continue into June, but it’s safe to say that another rate move will be data-dependent, so stronger US numbers will increase the likelihood of a quarter-point hike at the June policy meeting. Janet Yellen’s speech on Friday will be closely watched. Will she reinforce the hawkish tone of her FOMC colleagues, or well she dampen growing enthusiasm about a June move?

USD/JPY Fundamentals

Thursday (May 26)

• 19:30 Japanese Tokyo CPI. Estimate -0.4%. Actual -0.5%
• 19:30 Japanese National Core CPI. Estimate -0.4%. Actual -0.3%

Friday (May 27)

• Day 2 – G7 Meetings
• 1:00 BOJ Core CPI. Estimate 1.0%. Actual 0.9%
• 8:30 US Preliminary GDP. Estimate 0.8%
• 8:30 US Preliminary GDP Price Index. Estimate 0.7%
• 10:00 US Revised UoM Consumer Sentiment. Estimate 95.7
• 10:00 US Revised UoM Inflation Expectations
• 13:15 US Fed Chair Janet Yellen Speaks

*Key releases are highlighted in bold

*All release times are EDT

USD/JPY for Friday, May 27, 2016

USD/JPY May 27 at 10:40 EDT

Open: 109.70 Low: 109.55 High: 110.00 Close: 109.59

USD/JPY Technical

• USD/JPY posted gains in the Asian session but has given up these gains in European trade
• 109.87 remains fluid and has switched to a resistance role. It is a weak line and could see further action during the day
• 108.37 is providing strong support
• Current range: 108.37 to 109.87

Further levels in both directions:

• Below: 108.37, 107.57 and 106.19
•  Above: 109.87, 110.66, 111.30 and 112.26

OANDA’s Open Positions Ratio

The USD/JPY ratio is showing slight movement towards long positions on Friday, reversing the direction which marked the Thursday session. Long positions retain a majority (57%), indicative of trader bias towards USD/JPY breaking out and moving higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.