USD/JPY steady as Japanese economy contracts

The Japanese yen climbed as much as 0.85% earlier on Thursday but has pared most of those gains. USD/JPY is trading at 155.38, up 0.31% in the European session.

Japan’s economy contracted in the first quarter. GDP declined by 2% y/y in the first quarter, following a revised 0% reading in Q4 2023. This was weaker than the market estimate of -1.5.%. On a quarterly basis, GDP declined by 0.5%, down from a revised 0% reading and just above the market estimate of -0.4%.

The disappointing GDP release was a result of weak private consumption, which declined for a fourth consecutive quarter. Consumers and companies cut spending due to high inflation and sluggish wage growth. As well, exports decreased in the first quarter, as global demand remains weak.

Yen surges as US inflation eases to 3.4%

After several US inflation reports which pointed to higher inflation, April CPI reversed directions and dropped from 3.5% to 3.4%. The decline in inflation, especially in the core rate, raised expectations of a Fed rate cut and sent the yen surging 0.98% in the aftermath of the inflation report. The markets have priced in a September rate cut at 70% and a rate cut before the end of the year at 92%, according to the CME FedWatch tool.

Overlooked by all the attention to the inflation report, US retail sales fell to 3% y/y in April, down sharply from a revised 3.8% in March. Monthly, retail sales were flat, compared to a revised 0.6% in March. This points to consumers cutting down on spending due to high interest rates and high inflation.

USD/JPY Technical

• USD/JPY pushed below support at 154.21 earlier and put pressure on support at 153.51
• There is resistance at 155.38 and 156.08

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