- The USD/JPY exchange rate shows high sensitivity to US 5- and 10-year Treasury yields, maintaining a correlation close to 0.95.
- Upcoming US CPI data release on Wednesday is anticipated to have significant implications for the Federal Reserve's rate outlook.
- Current technical indicators signal a potential breakout in USD/JPY, with bearish momentum becoming increasingly apparent.
- Key levels to watch include support at 148.65, and resistance positioned around the 50-day and 200-day moving averages.
Market Context
The USD/JPY currency pair remains closely linked to fluctuations in long-term US Treasury yields. This is evidenced by a remarkable correlation near 0.95 with both 5-year and 10-year yields, highlighting that changes in US growth and inflation expectations are primarily driving price movements, rather than speculation about Federal Reserve rate adjustments. As we approach a crucial week in terms of US inflation data, market participants are eager to interpret the implications for the Fed's monetary policy, which is essential for gauging future economic growth and inflation trends. Additionally, technical indicators suggest that USD/JPY might be on the brink of a significant shift, with growing bearish momentum amid a compressing price range.
Bond Yield Influences on USD/JPY
Source: TradingView
The relationship between USD/JPY and longer-term US bond yields has shown extraordinary consistency, with significant correlation figures of 0.95 and 0.94 observed over the last month for 5-year and 10-year yields, respectively. This strong correlation indicates that US economic variables—especially growth and inflation forecasts—are having a more substantial effect on USD/JPY than shifts in Japanese interest rates. In essence, the focus for traders remains on the US yield environment as it pertains to USD/JPY shifts.
Key Economic Events on the Horizon
This week, two critical events stand out for their potential market impact: the release of the US Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday.
Source: TradingView
The CPI report is expected to be particularly impactful, with market expectations already pricing in a high likelihood of a 25 basis point cut from the Fed. A significant upside surprise in CPI could cause a major recalibration of market expectations, particularly regarding subsequent rate adjustments. Conversely, the PPI data, while somewhat less influential, will contribute important context as it feeds into the Fed's preferred measure of underlying inflation—the core Personal Consumption Expenditures (PCE) deflator.
Source: Bloomberg
In light of the upcoming data releases, the discourse surrounding Fed policy will likely be at the forefront, especially with a media blackout preventing Fed officials from commenting prior to the FOMC meeting. Additionally, the economic calendar for Japan is relatively light, although traders should keep an eye on the Japanese PPI report, which may yield insights into upstream price pressures ahead of the Bank of Japan’s upcoming decision.
Technical Evaluation for USD/JPY
Shifting focus to technical setups, the recent breakout observed in US 10-year Treasury futures is notable, particularly following the strong payroll report last Friday. This breakout has seen prices rise above key resistance levels, including the 50-day and 200-day moving averages, and a critical horizontal resistance at 115.05.
Source: TradingView
With both RSI and MACD indicators showing bullish momentum, the potential for further upward movement appears promising. Sustaining prices above this breakout zone would typically suggest downward bias for both benchmark yields and the USD/JPY pair.
Bearish Momentum Develops in USD/JPY
Despite US 5- and 10-year yields registering multi-month lows, USD/JPY has managed to hold above its December lows, beginning the trading week above the 150 mark. However, bearish signals from momentum indicators like MACD and RSI suggest a prevailing sentiment to sell into any rally or bearish break.
Source: TradingView
The USD/JPY pair has demonstrated a notable narrowing of its trading range over the past two weeks, hinting at a potential symmetrical triangle pattern formation. Given the current bearish momentum signals and the direction of the price action, the likelihood of a downward breakout appears to be increasing. A break below the triangle support could trigger a move towards 148.65, the low from December 3. Should this level fail to hold, 147.20 could become a focal point for bearish traders. Conversely, breaking through triangle resistance may signal a test of the 50-day and 200-day moving averages.
