USD/JPY breaks over 125 ahead of US inflation data

European bourses are heading for a weaker start on Tuesday after a brutal sell-off on Wall Street on Monday and ahead of a busy day on the data front.

•         UK labour market tightens, GBPUSD tests 1.30
•         DAX falls as German ZEW economic sentiment is expected to decline further
•         US CPI is expected to rise to 8.3%, as USD/JPY trades around a seven-year high

Rising bond yields and expectations of a more hawkish Fed hit demand for US stocks on Monday. High growth tech stocks, which are particularly sensitive to the interest rate outlook, bore the brunt of the selloff. The Nasdaq closed over 2% lower, and the futures are still falling, while the Dow Jones closed down 1.2%.

UK jobs data

Data revealed that the UK jobs market continues to tighten. Unemployment ticked lower to 3.8% in the three months to February, down from 3.9% and below its pre-pandemic level. Meanwhile, the timelier claimant count declined by 46.9k after a 58k fall in February. Wages continued to rise, jumping by 5.4% (including bonus) in the three months to February, which is below inflation of 6.2% in February, intensifying the squeeze on households while piling pressure on the BoE to hike rates again to rein in inflation.

Following the upbeat data, the FTSE, although trading lower, is falling less than its European peers. GBP trades lower versus the mighty USD, close to the key psychological level of 1.30 and flat against the euro.

German ZEW economic sentiment data

Looking ahead, attention will first turn to German ZEW economic sentiment data, which is expected to show that economic morale fell again in April to -48, down from -39.9. Surging inflation and uncertainty stemming from the Russian war are expected to weigh on confidence.

Last week, the German DAX fell over 1% and is heading lower today, testing support at the key psychological level of 14,000.

US CPI

US inflation data will probably be the most closely watched data release today. Expectations are for consumer prices to rise to 8.3% YoY in March, up from 7.9% in February. Meanwhile, core inflation, which removes more volatile items such as food and fuel, is expected to rise to 6.6% YoY, up from 6.4%. Inflation is expected to be hot; that is nothing new. What the market is interested in is what the Fed plans to do and whether the Fed will tip the US into recession, bringing the inflation back under control?

A hot inflation print could cement a 50-basis point rate hike by the Fed at the May meeting. Currently, this is 82% priced in. While a recession seems unlikely at the moment, the bond market has briefly sounded the alarm that a recession could be coming following the brief inversion of the 2- and 10-year yield.

USD/JPY is in focus due to the central bank divergence. The pair rose to a seven-year high yesterday at 125.75. A break above here today could take the pair back above 126.00 and towards levels not seen for 20 years.