Trading has been subdued ahead of the U.S. Consumer Price Index (CPI) release, with moves in both directions struggling to gain traction.
USD/JPY rose to 158.51 during the Tokyo morning before pulling back to 158.11. It recovered to around 158.35 early in the London session, but has yet to establish a clear direction.
The key question tonight is whether U.S. inflation is strong enough to reinforce expectations for further rate hikes. The core index, which excludes food and energy, will be particularly important.
USD/JPY
USD/JPY has found buyers on dips, while concerns about official warnings over yen weakness are keeping traders cautious about chasing the pair higher.
If the pair breaks above today’s high of 158.51 after the CPI release and holds there, a move toward 159.00 could come into focus. Conversely, a break below today’s low of 158.11 would raise the risk of a pullback below 158.00 and into the upper 157s.
In either case, whether U.S. yields move in the same direction will help gauge the durability of the exchange-rate move.
What to Watch in U.S. CPI
The September U.S. CPI report is due at 21:30 Japan time.
- Headline CPI, year over year: 3.6% expected, versus 3.4% previously
- Headline CPI, month over month: 0.6% expected, versus 0.4% previously
- Core CPI, year over year: 2.5% expected, versus 2.4% previously
- Core CPI, month over month: 0.2% expected, versus 0.3% previously
The headline measures are expected to accelerate, partly reflecting higher oil prices, while monthly core inflation is expected to ease. It will be important to determine whether price pressures remain concentrated in energy or are broadening into housing and services.
If core inflation also exceeds expectations, higher U.S. yields and dollar demand could follow as markets price in a greater chance of additional rate hikes. A softer-than-expected report could reduce the urgency for further tightening and weigh on the dollar.
If headline and core inflation send mixed signals, the initial market move could reverse.
How to Read the Reaction
Immediately after the release, assess the response in U.S. yields and equities alongside the inflation figures. If the dollar rises but yields fail to move higher, be cautious about assuming the advance will last.
The Federal Reserve’s Beige Book is also due at 03:00 Japan time on October 15. Watch whether companies’ pricing plans and employment conditions reinforce or alter the policy outlook following the CPI report.
The Euro and Yen Crosses
EUR/USD rebounded to 1.1211 in Tokyo but has struggled to rise further around 1.1200 in the European session.
A stronger CPI report could weigh on EUR/USD through renewed dollar demand. A softer report may leave room for a rebound, but the pair’s ability to hold above 1.1200 will be key.
EUR/JPY and GBP/JPY will be influenced both by USD/JPY and by the euro’s and pound’s respective moves against the dollar. Monitor the European currencies as well as USD/JPY.
Key Levels and Events for Overseas Trading
- How far core CPI month over month deviates from the 0.2% forecast
- Whether USD/JPY breaks above 158.51 or below 158.11
- Whether U.S. yields confirm the initial currency-market move
- Whether the U.S. equity response reinforces yen buying or selling
- Whether the Beige Book changes the post-CPI outlook
U.S. CPI is today’s main catalyst. Beyond the immediate market reaction, assess the details of core inflation and the response in U.S. yields to determine whether USD/JPY’s move can continue.
