Why today’s hot European inflation data could dent the Yen

Spain and France struggle to maintain disinflation path

The latest inflation data out of the eurozone has seen France and Spain post yet another upward move for headline CPI denting hopes that we will see price growth return towards target. Those two nations have been particularly interesting cases of late, with both struggling to maintain the downward trajectory after falling to the 6% region. They are ahead of the curve to a large extent, but the fact that they are seeing two consecutive months of flatlining or rising CPI figures around the 6% mark is a worry. The chart below highlights how US inflation has similarly stalled around this area, with the latest US CPI figure of 6.4% representing a halt to the rapid decline seen over the prior six-months. While we are yet to see the main eurozone inflation figure stall, we are undoubtedly being provided with a warning sign that US and European inflation may struggle to continue its recent decline.

One of the recent benefactors of falling inflation rates throughout Europe and the US has been the Yen, with the continued rise in Japanese CPI making the currency more attractive after a prolonged sell-off. However, that benefit looks to be fading, with the Bank of Japan Governor nominee Ueda continuing to support the ongoing ultra-loose monetary policy. That willingness to maintain rock bottom rates comes in stark contrast to the North American and European focus on tightening monetary policy further in a bid to drive down inflation.

Should we see US and European inflation struggle in its bid to head down towards target, there is a good chance we see the Yen as a target to strengthen against. A risk-off move for markets would bring dollar upside, thus highlighting USDJPY longs as a potential trade for those looking for equity markets to roll over. CADJPY looks another interesting market, with the correlation between CAD and crude meaning that this is a potential market to watch if you are simultaneously expecting a resurgence in crude oil. Meanwhile, European currencies look interesting for those looking for equity markets to remain relatively well bid, with the relatively lofty CPI figures in the UK and eurozone providing a significant degree of pressure on central banks to maintain their hawkish stance.

USD/JPY technical analysis

USD/JPY has pushed up into a fresh two-month high today, following a short retracement yesterday morning. We are clearly within a bullish trend of late, with that pattern likely to persist as we move forward. That bullish view holds unless we see price fall back below the 134.05 support level.

CAD/JPY technical analysis

CAD/JPY has similarly been on the rise of late, with price recovering after a protracted decline that ended at an ascending trendline back in mid-January. The uptrend seen since looks likely to continue apace, with any rebound in crude oil providing further legs to that move. The fact that we have seen the pair do so well in the face of recent crude declines does signal a potential outperformance if oil does turn upwards. A bullish view holds unless price falls back below the 0.9904 swing-low.

EUR/JPY technical analysis

EUR/JPY has seen a sharp rise over the course of the day, with the inflation data seen this morning bringing about an increased feeling that the ECB will likely keep rates higher for longer. The push through 144.16 yesterday brought about a fresh two-month high, with today’s rally furthering that push upwards. This looks likely to represent just the beginning of this move as long as the recent sideways move in Spanish and French inflation spreads to the wider eurozone. With that in mind, a bullish trend holds unless price falls back below the 142.15 swing-low.

GBP/JPY technical analysis

GBP/JPY looks similar to EUR/JPY, with price pushing sharply higher. Much of this comes down to the expectation that what is happening in the US and increasingly the eurozone will ultimately come in the UK. With that in mind, near-term downside for UK inflation will come against a backdrop of expectations that it may well stutter before long. As such, a bullish outlook holds here, with a decline through 161.21 required to negate that positive view.