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Japanese Yen Surges as USD/JPY Dips in Response to US CPI Data; BoE Takes Center Stage Next

by Rishika Mirchandani   ·  May 11, 2023   ·  

Over the last 24 hours, the Japanese Yen has been the top-performing major currency, with USD/JPY falling by approximately 0.7%. This represents the worst day for the pair in the past week. The focus was on the latest US CPI report, which showed the headline inflation gauge at 4.9% y/y in April, slightly below the 5.0% median consensus. However, the core gauge, which excludes volatile food and energy prices, remained elevated at 5.5% y/y, indicating that underlying price pressures remain sticky.

Investors cautiously increased their expectations of rate cuts from the Federal Reserve later this year, resulting in declines in Treasury yields across the maturity spectrum. This development has shifted attention to the Japanese Yen, as a static Bank of Japan that is keeping monetary policy ultra-loose means that JPY will be primarily influenced by external factors.

With other central banks, such as the Fed, expected to turn dovish from hawkish, the Yen may take advantage of the anticipated decline in competing cash returns abroad.

The next significant event for the Japanese Yen will likely be the Bank of England monetary policy announcement, scheduled for Thursday at 11 GMT. The market expects a rate hike to 4.5% from 4.25%, but the forward guidance will be more critical.

Unlike the Fed, more rate hikes are being priced in from the BoE later this year, with a pivot to cutting in early 2024. If yields in the UK fall due to this guidance, then the Yen may continue its upward trend.

Looking at the daily chart, USD/JPY appears to have been carving out an Ascending Triangle chart formation since the end of last year. Recently, prices turned lower off the ceiling around 138.17.

Further losses could place the focus on the rising floor of the chart formation. Until a breakout is achieved, the near-term technical is out.

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