USD/JPY – Yen Rally Continues as US Inflation Higher Than Expected

The Japanese yen has posted sharp gains in the Wednesday session, continuing the upward trend seen on Tuesday. In North American trade, USD/JPY is trading at 106.77, down 0.97% on the day. On the release front, Japanese GDP expanded 0.1% in the fourth quarter, shy of the estimate of 0.2%. In the US, consumer inflation beat expectations. CPI jumped 0.5%, above the estimate of 0.3%. Core CPI remained steady at 0.3%, edging above the forecast of 0.2%. Retail sales reports were dismal. Retail Sales was flat at 0.0%, short of the estimate of 0.5%. Core Retail Sales declined 0.3%, well off the forecast of +0.2%. Later in the day, Japan releases two manufacturing events – Core Machinery Orders and Revised Industrial Production.

The yen continues to impress, as the currency has added another 1.8% this week. The currency has jumped 5.2% since the start of 2018, and has received a boost from the recent stock market turbulence which sent share prices in a tailspin. Nervous investors continue to snap up the safe-haven yen, and inflation concerns could reignite a stock market sell-off and further bolster the yen rally.

One of the catalysts of last week’s stock market correction was investor concern that higher inflation could lead to more interest rate hikes. This holds true for the Federal Reserve and the Bank of England, both of which might accelerate the pace of rate hikes during 2018. However, Japanese inflation remains well below the BoJ target of around 2 percent, and there is no pressure on the BoJ to raise rates. This was underscored on Monday, as the Japanese Producer Price Index (PPI) slowed for a second straight month, to 2.7%. This marked the lowest gain in PPI since July.

With US consumer inflation beating estimates in the January reports, the Fed will be reevaluating its projection for rate hikes in 2018. Currently, the Fed is planning three hikes this year, but that could change to four, or even five hikes, if inflation continues to head upwards and the robust US economy maintains its strong expansion.  The new head of the Federal Reserve, Jerome Powell, received a rude welcome from the stock markets, as he started his new position last week. Powell sought to send a reassuring message on Tuesday, saying that the Fed is on alert to any risks to financial stability. However, it is clear that the Fed’s hand is limited when it comes to stock markets moves, and the volatility which we saw last week could resume at any time.

USD/JPY Fundamentals

Tuesday (February 13)

• 18:50 Japanese Preliminary GDP. Estimate 0.2%. Actual 0.1%

Wednesday (February 14)

• 8:30 US CPI. Estimate 0.3%. Actual 0.5%
• 8:30 US Core CPI. Estimate 0.2%. Actual 0.3%
• 8:30 US Core Retail Sales. Estimate 0.5%. Actual 0.0%
• 8:30 US Retail Sales. Estimate +0.2%. Actual -0.3%
• 10:00 US Business Inventories. Estimate 0.3%. Actual 0.4%
• 10:30 US Crude Oil Inventories. Estimate 2.8M. Actual 1.8%
• 18:50 Japanese Core Machinery Orders. Estimate -1.9%
• 23:30 Japanese Revised Industrial Production. Estimate 2.7%

Thursday (February 15)

• 8:30 US PPI. Estimate 0.4%
• 8:30 US Empire State Manufacturing Index. Estimate 17.7
• 8:30 US Philly Fed Manufacturing Index. Estimate 21.5
• 8:30 US Unemployment Claims. Estimate 229K

*All release times are EST

*Key events are in bold

USD/JPY for Wednesday, February 14, 2018

USD/JPY February 14 at 11:15 EST

Open: 107.82 High: 107.90 Low: 106.72 Close: 106.77

USD/JPY Technical

USD/JPY posted considerable losses in the Asian session but recovered much of the losses in European trade. The pair has resumed its downward trend in North American trade

• 106.64 is under pressure in support. It could break in the North American session
• 107.29 is the next resistance line

Current range: 106.64 to 107.29

Further levels in both directions:

• Below: 106.64, 105.53 and 104.32
• Above: 107.29, 108.21, 109.11 and 110.10

OANDA’s Open Positions Ratios

USD/JPY ratio is unchanged in the Wednesday session. Currently, long positions have a majority (72%), indicative of trader bias towards USD/JPY reversing directions 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.