Ripe for a bearish breakout as Japan CPI soars

The Japanese yen retreated slightly even after the relatively strong Japanese inflation data. The USD/JPY pair is trading at 128, which is slightly above this week’s low of 127. The pair is a few points below its year-to-date high of 131.3. 

Japan inflation hits BOJ target

Consumer prices in Japan rose in April this year as the cost of food and fuel kept rising. According to the country’s statistics agency, the headline CPI rose from 1.2% in March to 2.5% in April this year. Excluding the volatile food and energy prices, inflation rose by 2.1% in April.

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There are several catalysts to Japan’s inflation. First, the Japanese yen has declined sharply in the past few months. In April, it dropped to the lowest level since 2002. A weaker yen is usually inflationary since Japan imports all of its energy from countries like Saudi Arabia and the US. 

Second, the crisis in Ukraine pushed prices of most items upward. In particular, it pushed the cost of natural gas and oil sharply higher. Further, inflation was caused by the ongoing logistics challenges facing many small and large companies.

The USD/JPY pair declined because many investors believe that the BOJ will stick to its dovish policy. In its most recent meeting, the bank said that it will maintain interest rates at the current range and provide more stimulus to the economy. 

As a result, there is a major divergence between the Fed and the BOJ. The Fed has insisted that it will do whatever it can to reduce consumer prices, which are now hovering at their highest level in decades. This will include hiking rates by 0.50% in the coming two meetings and the switching to 0.25% for the remainder of the year. At the same time, the bank will start reducing its balance sheet.

USD/JPY forecast

The USD/JPY pair was in a strong bullish trend in the past few months. This pushed it to a high of 131.16, where it found a ceiling. This month, the pair has moved below the 25-day moving average while the Relative Strength Index (RSI) has formed a bearish divergence pattern. It is also hovering slightly above the important support level at 127.56.

Therefore, the pair will likely have a bearish breakout in the coming days. If this happens, the next key support level to watch will be at 126.

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