USD / JPY PRICE OUTLOOK: US DOLLAR HINGES ON INFLATION DATA
- The US dollar rose slightly higher on Monday as the market position was ahead of inflation data
- USD / JPY price behavior may provide a clear response to Tuesday’s monthly CPI statement
- The downside risk called may strengthen and increase the strength of the US dollar if headline inflation exceeds 5% year-on-year.
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The performance of US dollar prices reached an overall position major currency pairs on Monday. USD/JPY and EUR / USD, the two largest components of the DXY index, advanced 23 and 16 points, respectively. This can be explained by changes in traders’ positions before the risk of high-impact events stemming from tomorrow’s US inflation data release. The monthly CPI report is expected to cross the wires on Tuesday, July 13 at 12:30 GMT.
As in detail DailyFX economic calendar, the CPI title is assumed to be 4.9% if core inflation is 4.0%. US dollar bulls are likely to have a keen eye on potential upward surprises in CPI data as this puts more pressure on the Federal Reserve to reduce asset purchases. This means that real or lower-than-expected inflation is likely to cause a broader decline in the US dollar. The latter scenario appears to be more likely to materialize, which may provide an opportunity for US dollar bears to consider a slowdown in recent strength.
DXY INDEX – US DOLLAR PRICE MAP: WEEKLY FRAMEWORK (NOVEMBER 2019 – July 2021)
Not to mention FOMC officials have resolutely expressed how an increase in inflation is not only expected but also likely to be transient. Moreover, given last year’s move to an average inflation target, the Fed is ready to review temporary inflation overruns while maintaining credibility towards its appropriate policies. However, another important surprise for inflation data, perhaps with an average CPI of 5% north, may make the temporary narrative difficult.
This brings an important focus technical levels which may affect the pricing of the DXY Index. In particular, the potential for resistance to the broader US dollar index appears to be huge between 92.80 and 93.50. The removal of this technical barrier could open the door for US dollar bulls to the 94.50 level supported by the high rise in September 2020. On the other hand, technical support can be found near the simple moving average of about 20 weeks to the 91.50 price level.
Last but not least – a quick look overnight indirect volatility The US dollar indicates that the response to tomorrow’s CPI report may be relatively subdued. For example, the expected overnight volatility of USD / JPY of 6.4% is slightly modest above its 20-day average of 5.5%. This figure is also below the expected overnight volatility of USD / JPY of 7.9%, which indicates the release of last month’s inflation data. In itself, this allegedly reinforces the likelihood that the strength of the US dollar has waned, as traders place more emphasis on the Federation’s other powers – full employment – than on inflation and price stability.
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