The USD/JPY exchange rate has been steady this week, with little change as traders wait for the upcoming US Consumer Price Index (CPI) data. Currently, the USD/JPY is around 147.84. The US has agreed to change tariff stacking and reduce auto tariffs after recent trade talks. The technical analysis shows that bearish trends are limited, with the Relative Strength Index (RSI) decline calming down. Key support levels are at 147.10 and 145.80/146, while resistance is at 147.90 and 149.40/50. Interest in trading may lessen due to weaker US data and potential interest rate changes from the Federal Reserve (Fed) and Bank of Japan (BoJ).

Political Uncertainty and Market Implications

Political instability, such as Prime Minister Ishiba’s leadership issues and concerns about the country’s credit rating related to fiscal health, could support the USD/JPY pair. However, the ongoing ‘sell USD’ sentiment and the narrowing yield gap between US Treasuries and Japanese Government Bonds may influence it negatively. The USD/JPY continues to hover around 147.84 as traders anticipate the US CPI data. This report, set to be released on August 13, is expected to reveal a 0.3% month-over-month increase in core inflation. This data is crucial as it will significantly impact the Fed’s interest rate decisions in September. Given the uncertainty surrounding the CPI report, we suggest considering options trading to take advantage of potential volatility. A significant market move, either upward or downward, could benefit traders with both call and put options. We observed similar volatility spikes during previous key inflation reports in late 2023 and 2024 when the market was sensitive to changes in Fed policies. If inflation comes in lower than expected, we might see a stronger trend in ‘sell USD’ activity, pushing the exchange rate toward the 147.10 support level. The yield difference between US 10-year Treasuries, currently about 4.10%, and Japanese Government Bonds at 0.95% has been closing this year. A weaker CPI report would likely strengthen this trend, making the yen a more appealing option.

Possible Market Reactions to Inflation Data

Conversely, if inflation turns out to be higher than anticipated, it could challenge the possibility of Fed rate cuts and push the exchange rate toward the 147.90 resistance point. Domestic issues, like PM Ishiba’s declining cabinet approval ratings around fiscal reforms, might also impact the yen negatively. This mix of factors could lead the exchange rate to aim for the upper resistance zone at 149.40. The initial excitement from recent trade negotiations, which amended auto tariffs, appears to be fading. The weaker US economic data from last month, including slightly disappointing retail sales numbers, has shifted focus back to monetary policy. For us, this means the key factor affecting USD/JPY in the upcoming weeks will be the anticipated decisions of the Fed compared to the Bank of Japan, rather than trade developments. Create your live VT Markets account and start trading now.

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