USDJPY Japan GDP Reaction and Upcoming US CPI

With Japan avoiding a technical recession, attention now turns to upcoming US CPI data, which is expected to affirm the narrative that the Fed will implement its first rate cut in the summer.

Japan's GDP Revision Does Little to Alter Expectations for BOE

Japan published a revised estimate for its Q4 GDP, adjusting GDP to a modest 0.1% growth and avoiding a technical recession. However, the revision was smaller than the consensus forecast of 0.3%. In reaction to the data, the yen remained largely unchanged against the dollar as markets had anticipated avoiding an economic contraction.

The GDP revision supports the narrative emerging last week that the BOJ may soon raise interest rates for the first time in years. Governor Kazuo Kuroda's comments last week reinforced this expectation, stating that the economy was progressing in line with the central bank's inflation target. The USDJPY fell back below the 147 handle as Japan avoided entering the technical recession. It has been on a downward trend as speculation that the BOJ may hike as early as this month has soared.

US CPI is Heating Up, But it is Still on Track

Tomorrow's release of US inflation figures is anticipated to be the week's highlight, with investors closely monitoring the data to gauge if it will support expectations of a June rate cut. While inflation is expected to remain high and possibly even increase, it would be due to short-term factors, like higher gasoline prices. The underlying trend is expected to remain unchanged too, with annual inflation pretty much stable. However, the mixed NFP results from February's figures could add more significance to this release as investors seek clarity.

In terms of expectations, CPI  is projected to print a 0.3% figure month-on-month, with core falling to 0.3% from 0.4% in January. Year-on-year, headline inflation is anticipated to tick up to 3.2% from 3.1%, partly due to base effects. Meanwhile, core inflation is seen easing slightly to 3.8% from 3.9%. Earlier rate cuts would require inflation to be much closer to the Fed's target, even though it need not fall all the way to 2%, as officials have clarified the initial cut could occur before inflation reaches target levels.​

Should US inflation data on Tuesday disappoint expectations, it may add downward pressure on the USDJPY in the coming days.​

USDJPY in Head-And-Shoulders?

The USDJPY may be approaching the 146 level, where support could form the neckline of a potentially head-and-shoulders pattern. This may allow the pair to retest the 148.80 region and even reach 149.20. However, a break below 146 could invalidate the pattern altogether, shifting focus to the 145 area.​

Source: SpreadEx / USD/JPY

Key Takeaways

Japan avoided a technical recession with a modest GDP growth revision of 0.1% in Q4. This supported views that the BOJ may soon raise interest rates and supported the Japanese yen. US CPI is anticipated to show that inflation will remain high on Tuesday due to short-term factors, with the underlying trend steady. Investors will monitor whether the data reinforces expectations of a Fed rate cut in June.