USD/JPY has risen above 147.00 as traders await the upcoming US Consumer Price Index (CPI) data on Tuesday. The Japanese Yen is losing ground against the US Dollar, pushing USD/JPY closer to the 148.00 mark. Japan’s low interest rate of 0.5% makes its currency less attractive compared to higher-yield currencies like the US Dollar. The Federal Reserve’s interest rate, between 4.25% and 4.50%, supports the strength of the USD/JPY pair.

Expected US CPI Data

The US CPI is expected to show a 0.3% increase for June and an annual rise from 2.4% in May to 2.7%. The Core CPI, which excludes food and energy, may also rise by 0.3% month-over-month, with an annual rate of 3% anticipated. From a technical viewpoint, USD/JPY has support at the 38.2% Fibonacci retracement level of the January-April decline at 147.14. Resistance is at 148.00; if this level is broken, we might see a retest of the May high at 148.65. The US Dollar is the world’s most traded currency, making up over 88% of global forex transactions. Decisions by the Federal Reserve, like interest rate changes and quantitative easing, greatly affect the US Dollar. Generally, quantitative easing weakens the Dollar, while quantitative tightening strengthens it.

Yield Spread Impact

The movement of USD/JPY towards 148.00 is significant. It’s influenced by the vast difference in monetary policy between the Bank of Japan and the Federal Reserve. Japan maintains a low-interest policy with rates at just 0.5%, while the Federal Reserve’s rates are between 4.25% and 4.50%. This yield gap drives capital flows, currently favoring the Dollar. This relationship is evident not just in the numbers but also in how traders react to events like the CPI report. With core inflation likely at 0.3% monthly and 3% annually, this could encourage the Fed to keep its hawkish stance. Even slight strength in this data can raise expectations that rates might stay elevated longer. This scenario boosts USD strength, especially against a currency linked to a central bank that isn’t expected to change its stance. Looking at market structure, we can see that price movements are following technical limits. Support is seen around 147.14, the Fibonacci retracement level from earlier this year, while the price is testing the resistance near 148.00. A breach of this level could bring the price to the May high of 148.65. There are no significant barriers technically. Additionally, the Dollar plays a crucial role beyond just bilateral currency pairs. It’s central to global trade, with almost 90% of all currency transactions involving the USD. Central banks consider not only local factors but also the behavior of the Dollar. Previous periods of quantitative easing led to considerable weakening of the Dollar. In contrast, tightening policies typically strengthen the Dollar, a fact not easily overlooked. In this context, if upcoming data confirms ongoing inflation, we might see shifts in short-term rate expectations. Derivative contracts sensitive to these rates, especially those tied to the short end of the yield curve, could readjust quickly. As we move forward, the focus shifts from whether the Yen will strengthen to how the Dollar will perform—specifically how inflation and rates may impact its strength. Markets are proactive and don’t wait for confirmation; they anticipate. So do we. Create your live VT Markets account and start trading now.

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