Market update: hot US inflation sparks bullish breakout, forecast on USD/JPY levels

After a subdued start to the week, USD/JPY rocketed higher on Tuesday, rallying more than 0.9% and breaking above the psychological 150.00 mark – an explosive move that saw the pair reach its highest level in nearly three months.

USD/JPY & treasury yields performance

The US dollar’s strong performance was driven by soaring US Treasury yields following hotter-than-anticipated US inflation data. For context, both headline and core CPI for January surprised on the upside, at 3.9% y-o-y and 3.1% y-o-y, respectively, two-tenths of a percentage point above expectations.

US inflation trend

Limited progress on disinflation has prompted traders to scale back, easing expectations for the year, as seen in the chart below. The possible start date of the FOMC rate-reduction cycle has also been pushed out, with market pricing now pointing to the first cut occurring at the June meeting.

2024 Fed funds futures – implied rates by month

With price pressures showing extreme stickiness, the Fed will be reluctant to start lowering borrowing costs any time soon; in fact, it may even delay its first move until the second half of 2024 to play it safe. This could translate into higher US yields in the near term, a bullish outcome for the US dollar.

USD/JPY technical analysis

USD/JPY soared on Tuesday, clearing resistance at 150.00 and hitting its highest mark since mid-November. Although the pair remains entrenched in a solid uptrend, the exchange rate is approaching levels that could make the Japanese government uncomfortable and inclined to step in to support the yen.

In the event of FX intervention, USD/JPY could take a sharp turn to the downside, reversing part of its recent advance. In this scenario, possible support zones can be identified first at 150.00, followed by 148.90. On further weakness, all eyes will be on 147.40 and 146.00 thereafter.

In the absence of currency intervention or talk of it by Japanese authorities, the bulls are likely to press on before launching an all-out assault on last year’s high around the 152.00 handle. Additional gains from this point onward could draw attention to 152.70.

USD/JPY daily chart

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