- USD/JPY remains steady as it tests the 200-day moving average after signaling a bullish momentum shift.
- Upcoming US inflation data is poised to influence market yields and foreign exchange trends.
- A robust core CPI could elevate yields, providing further support for USD/JPY.
- A disappointing inflation figure may restrict upward potential, leading to renewed selling interest.
Market Sentiment
The USD/JPY currency pair is currently engaged in a crucial test of the 200-day moving average on daily charts, following a noteworthy bullish breakout and an uptick in US Treasury yields. With US 10-year Treasury futures indicating a potential bearish reversal ahead of the inflation report set to release later Wednesday, a decisive breach above this moving average could facilitate a swift return to previously established highs from the recent US presidential elections.
Influence of US Treasury Yields on USD/JPY
Source: TradingView
The USD/JPY pair maintains a strong correlation with movements in US Treasury yields, particularly with five and 10-year yields reflecting a robust rolling correlation of 0.94 over the past month. This relationship underscores USD/JPY's ties to US economic growth and inflation, contrasting with its minimal connection to Japanese 10-year yields during the same timeframe.
US Treasury Futures Indicate Potential Yield Increases
Anticipating fluctuations in US Treasury yields can be complex, especially before pivotal economic announcements; however, futures market movements offer insights into the sentiment among bond traders.
Source: TradingView
After breaking higher in late November, the rally observed in futures encountered resistance earlier this week, bringing the price close to slipping below the critical 50-day moving average. Momentum indicators such as RSI (14) and MACD suggest a potential cooling off; while Monday's candle didn't fully validate a bearish engulfing pattern, a significant undershoot in the core US inflation report later today could hinder the retest of the bullish uptrend established on November 15.
Since futures prices move inversely to yields, a negative inflation report would create upward pressure on USD/JPY due to the established correlation.
Key Risks Surrounding US Inflation Data
Among the crucial metrics in the upcoming inflation report, the focus will be on the core CPI, which excludes volatile food and energy costs. A 0.3% increase in November is projected, a figure that would mark the fourth consecutive month at this level. Both short- and long-term assessments of this monthly change suggest an annualized rate of 3.6%, significantly above the Federal Reserve's target of 2%.
Source: TradingView
An inflation reading at or above expectations, particularly if it isn't overly influenced by shelter costs, could lead markets to reassess expectations regarding the Fed's potential rate cuts throughout the following year, consequently pushing yields higher along the US interest rate curve. Conversely, any undershoot in the core measure would likely yield an inverse reaction.
USD/JPY Faces Crucial Resistance at 200DMA
Source: TradingView
Analyzing the daily chart for USD/JPY, both price actions and momentum indicators appear to be trending in a positive direction. The price recently emerged from a symmetrical triangle formation with significant enthusiasm earlier this week, propelling the movement before encountering resistance at the 200-day moving average.
A sustained move above the 200DMA could lead to a retest of the level around 153.38, which has previously served as both support and resistance in November. Further resistance is sparse until reaching levels of 155.89 and 156.75.
Traders might consider utilizing the 200DMA as a strategic point for trade setups, positioning a stop-loss order on the opposite side depending on price movements around this level. Should the price fail to breach above the 200DMA, short positions could potentially be initiated beneath this threshold, with a protective stop placed above. Target levels may include former triangle support around 150.25 or even down to 148.65.
