USD/JPY Fundamental Daily Forecast – Stronger-Than-Expected CPI Data Could Trigger Upside Breakout

The Dollar/Yen is trading higher early Wednesday, but prices continue to move mostly sideways for a third day on relatively low volume. Expectations for higher interest rates are helping to underpin the Forex pair, stock market volatility has held the rally in check. Traders are also monitoring the Brexit negotiations between the European Union and the UK, and the simmering tensions over Italy’s budget between Brussels and Rome.

At 0519 GMT, the USD/JPY is trading 113.931, up 0.125 or +0.12%.

Bullish longer-term traders are focusing on the divergence between the hawkish U.S. Federal Reserve and the dovish Bank of Japan. Bearish short-term traders are monitoring the stock market and the situations in Europe for heightened volatility. This could lead to increased safe-haven buying of the Japanese Yen.

In economic news on Tuesday, the U.S. NFIB Small Business Index came in below expectations at 107.4, missing the 108.0 forecast. The Federal Budget Balance improved to $100.5 Billion, down from $116.6 Billion.

Also on Tuesday, Federal Reserve Governor Lael Brainard outlined Federal regulators’ approach to the supervision of artificial intelligence capabilities. She said, “Regulation and supervision need to be thoughtfully designed so that they ensure risks are appropriately mitigated but do not stand in the way of responsible innovation.”

In Japan, Quarterly Preliminary GDP came in at 0.3 percent, matching expectations. The previous quarter was upwardly revised by 0.7 percent. The Yearly Preliminary GDP Price Index fell 0.3 percent, missing the forecast for -0.1 percent. The previous report was downwardly revised to 0.0 percent.

Tertiary Industry Activity was also disappointing, falling 1.1 percent, missing the forecast for a 0.4 percent decline. Revised Industrial Production improved to 0.4 percent, beating the -1.1 percent estimate.

In summary, the Japanese economy shrank at an annualized rate of 1.2 percent in July-September, as consumer spending, investment and exports fell, according to government data released Wednesday. Dragging on growth for the world’s third-largest economy was diminished trade, with exports falling 1.8 percent and imports dropping 1.4 percent, the data showed. Consumer spending and company investments were also down.

Analysts said natural disasters during the third quarter weighed on consumer travel and spending. Other factors hurting the economy include the nation’s continuing labor shortage and slow wage growth.

Forecast

Generally speaking, renewed demand for risky assets and higher Treasury yields should drive the USD/JPY through this week’s high at 114.210 and into the October high at 114.580, followed by the November 6, 2017 main top at 114.728. The latter is a potential trigger point for an acceleration to the upside.

A risk-off scenario because of heightened stock market volatility, or turmoil in Europe is likely to drive investors into the safe-haven Japanese Yen, leading to a weaker USD/JPY.

Traders will also get the opportunity to react to the latest U.S. data on consumer inflation. The CPI is expected to come in at 0.3 percent. Core CPI is expected to have risen 0.2 percent.

Stronger than expected CPI data should be bullish for the USD/JPY because it will support the Fed’s case for additional rate hikes.