Today’s Market Outlook
USD/JPY Holds in the 159 Range as Inflation Concerns Persist Ahead of Tomorrow’s U.S. CPI
■ Market Overview
With Tokyo markets closed, USD/JPY is trading in the low 159 range during Asian hours.
Amid continuing uncertainty surrounding the Middle East, NY crude oil futures rose from around $78 to the $82 range the previous day and remain elevated around the mid-$82 level today.
Higher oil prices are fueling concerns about renewed inflation. Gold futures have also attracted buying interest, briefly approaching $4,500.
The market’s main focus has now shifted to tomorrow’s U.S. CPI release.
Although inflation is expected to slow, the expected decline is limited. With oil prices remaining high due to Middle East tensions, concerns over persistent inflationary pressure remain strong.
In overseas trading, the dollar is likely to remain supported ahead of the CPI release.
■ USD/JPY
USD/JPY is trading in the low 159 range.
After falling sharply into the 155 range following last week’s coordinated U.S.-Japan intervention, the pair has gradually been bought back and has recovered the 159 level.
The move is supported by persistent yen carry trades based on the U.S.-Japan interest-rate gap, inflation concerns caused by rising oil prices, and resilient U.S. yields.
However, the 159 range also represents a substantial return toward yen weakness following the coordinated intervention.
If yen weakness accelerates toward 160, concerns over rate checks or additional intervention by the Japanese and U.S. authorities are likely to intensify again.
A stronger-than-expected CPI report tomorrow could push USD/JPY toward 160, but it would also increase intervention risk at the same time.
■ Tomorrow’s U.S. CPI
Tomorrow’s CPI report is the key event.
Current market forecasts are as follows:
Headline CPI, year-on-year
+3.4%
Previous: +3.5%
Core CPI, year-on-year
+2.5%
Previous: +2.6%
Both headline and core inflation are expected to slow from the previous reading, but only modestly.
As a result, it remains uncertain whether the data will be soft enough for the market to gain confidence that inflation is easing convincingly.
Oil prices have recently climbed back into the $82 range, raising concerns that future energy costs could place renewed upward pressure on inflation.
If CPI exceeds expectations, expectations for a September Fed rate hike could strengthen again, potentially pushing U.S. yields and the dollar higher.
Conversely, if CPI falls below expectations, rate-hike expectations could weaken, making the recent USD/JPY rebound more vulnerable to a correction.
■ Inflation Concerns
The relationship between geopolitical risk and inflation is again becoming a major market theme.
If worsening Middle East tensions drive oil prices higher, gasoline prices and transportation costs could create broader inflationary pressure.
In addition, instability around key shipping routes such as the Red Sea and the Strait of Hormuz could disrupt supply chains and raise logistics costs.
Under such conditions, inflation may not decline as much as currently expected.
Markets will therefore focus not only on tomorrow’s CPI report, but also on how Middle East developments and oil prices affect the broader inflation outlook.
■ Middle East Developments
New tensions have emerged in the Middle East.
Another cargo ship was reportedly attacked by the Houthis in the Bab el-Mandeb Strait in the Red Sea. According to regional maritime-security authorities, the vessel was struck on deck and three people were reportedly killed.
The Bab el-Mandeb Strait is a vital shipping route linking the Red Sea and the Gulf of Aden.
Continued attacks on vessels in this area could lead to rerouted shipping, higher insurance premiums, and increased transport costs, potentially raising global logistics costs.
In addition to uncertainty surrounding the Strait of Hormuz, shipping risks in the Red Sea are rising again. It is therefore difficult to say that the Middle East crisis has fully stabilized.
■ Oil Market
NY crude oil futures rose sharply from around $78 to the $82 range the previous day and remain elevated around the mid-$82 level today.
Middle East uncertainty and supply concerns are supporting oil prices.
For the United States, higher oil prices increase concerns about renewed inflation and may support expectations that the Federal Reserve will keep rates higher for longer.
For Japan, higher oil prices worsen terms of trade through increased import costs and can become a factor for yen selling.
In other words, rising oil prices may place upward pressure on USD/JPY through both dollar buying and yen selling.
If oil prices rise further ahead of tomorrow’s CPI, USD/JPY may face stronger pressure to test the upside.
■ Reserve Bank of Australia
The Reserve Bank of Australia’s policy decision was the main event during today’s Asian session.
As widely expected, the RBA left its policy rate unchanged at 4.35%.
In its statement, the RBA said that the inflation impact of the Middle East conflict has so far been smaller than expected, but also noted that headline inflation remains too high.
It also highlighted continuing uncertainty over the resolution of the Middle East conflict, including the possibility that inflation could exceed forecasts while economic activity falls short of expectations.
The decision confirmed that the RBA remains highly attentive to the risk of renewed inflation driven by Middle East developments.
If central banks globally become more concerned about inflation again, major-country interest rates may remain elevated, supporting yen carry trades.
■ Gold Market
Gold futures have also been bought amid inflation concerns, briefly approaching $4,500.
Gold typically attracts inflows when geopolitical risks and inflation concerns intensify.
In the current environment, rising oil prices, Middle East tensions, and inflation uncertainty ahead of tomorrow’s CPI are supporting the gold market.
The fact that both oil and gold are rising suggests that markets are not simply focused on risk appetite, but are strongly pricing in inflation and geopolitical risks.
■ U.S. Housing Market
July existing home sales will be released later today.
The market forecast is 4.05 million, down from 4.09 million previously.
In the U.S. housing market, elevated home prices, high rents, and higher mortgage rates continue to weigh on demand.
A significantly weaker-than-expected result could trigger dollar selling on concerns over the U.S. economy.
However, with tomorrow’s CPI report approaching, market reaction is likely to remain limited unless there is a major surprise.
■ Today’s Key Economic Indicators
The main releases later today are:
・South African employment data
・South African manufacturing production
・Mexico industrial production
・U.S. existing home sales
There are few high-impact U.S. data releases today, leaving markets primarily focused on tomorrow’s CPI.
As a result, price action is likely to respond more to Middle East headlines, oil prices, and U.S. yield movements than to economic data.
■ U.S. Treasury Market
A $58 billion U.S. three-year Treasury auction is scheduled for today.
Ahead of tomorrow’s CPI release, the auction will provide a clue as to how much inflation risk the bond market is pricing in.
Weak demand could push U.S. yields higher and support dollar buying.
Strong demand, on the other hand, could lower yields and limit the dollar’s upside.
With USD/JPY trading in the 159 range, attention should also be paid to yield movements after the auction.
■ Key Points for London and New York Trading
① Whether USD/JPY can hold above 159
② Whether intervention concerns intensify as the pair approaches 160
③ Whether NY crude oil futures can remain above $82
④ Whether attacks on shipping in the Red Sea expand further
⑤ U.S. yield movements after the three-year Treasury auction
⑥ Market reaction to U.S. existing home sales
⑦ Whether gold breaks above $4,500
⑧ Whether September rate-hike expectations shift ahead of tomorrow’s CPI
■ Summary
USD/JPY is trading in the low 159 range, having retraced a significant portion of the yen-strength move that followed last week’s coordinated U.S.-Japan intervention.
Rising Middle East uncertainty has pushed NY crude oil futures into the $82 range, increasing concerns about renewed inflation.
Tomorrow’s U.S. CPI is expected to show headline inflation at +3.4% year-on-year and core inflation at +2.5%, representing only a modest slowdown.
If CPI exceeds expectations, September rate-hike expectations could strengthen again and USD/JPY may test the 160 level.
However, following the recent coordinated intervention, concerns over further intervention are likely to rise rapidly in the upper 159 range and around 160.
If CPI slows more than expected, lower U.S. yields and dollar selling could trigger another correction in USD/JPY.
Reports of an attack on a cargo vessel in the Bab el-Mandeb Strait show that geopolitical risks in the Middle East remain unresolved.
For the remainder of today, the focus will be on oil prices, U.S. yields, and Middle East headlines, while assessing whether USD/JPY can maintain the 159 range ahead of tomorrow’s CPI.
