USD/JPY slips after US inflation surprise

The Japanese yen has looked sharp lately but is considerably lower on Tuesday. In the North American session, USD/JPY is trading at 147.75, up 0.55%. The yen has rallied for five straight days, gaining 2.4% during that time.

US inflation rises to 3.2%

The US inflation rate crept higher in February. Headline CPI climbed 3.2% y/y, up from 3.1% in January and above the market estimate of 3.1%. On a monthly basis, CPI ticked higher to 0.4%, matching the market estimate and above the January gain of 0.3%. The increase in inflation was mainly due to energy costs, such as gasoline, falling less than expected.

Core CPI, which excludes food and energy and is considered a more reliable gauge of inflation trends, ticked lower to 3.8% year-on-year in February, lower than the 3.9% gain in January but above the market estimate of 3.7%. Monthly, core CPI remained steady at 0.4%, above the market estimate of 0.3%.

The US dollar responded to the inflation report with sharp swings against the major currencies. The markets have lowered rate cut expectations, as the Fed will be less inclined to lower rates if inflation is moving higher. The Fed is virtually guaranteed to pause at the March meeting and the probability of a June cut has fallen to 66%, compared to 90% just one month ago.

The US releases retail sales for February on Wednesday and an unexpected reading could cause further volatility for the US dollar. Retail sales fell to 0.6% y/y in January, compared to a sizzling 5.3% gain in December. The market estimate for February stands at 1%.

USD/JPY Technical

•  USD/JPY has pushed above resistance at 147.25 and 147.55, and is testing resistance at 147.93
• 146.87 and 146.57 are providing support