After a quiet start to the week, Tuesday’s (7/22) fundamental docket heats up a little bit. The main economic data point from the US will be the June CPI inflation numbers. After a month over month reading of 0.4% in May, the CPI is expected to have grown 0.3% in June. The core inflation , which excludes food and energy components, is forecast to be 0.2% after a 0.3% reading in May.
CPI Inflation Since June 2013:
On the year the CPI inflation for May was 2.1%, which was the strongest reading in a year.An increasing inflation rate can have impact on monetary policy and thus tomorrow’s inflation data can be a key determinant for USD-direction at least in the short-term. Let’s take a look at the USD/JPY and prepare for the inflation data.
Here are some initial observations from the daily-candle chart:
1) USD/JPY started the year at 105.44, and has been trading in a descending triangle ever since, with the triangle support and 2014-lows around 100.75.
2) Price has fallen below the 200-day SMA for the first time since Nov. 2012, and has so far remained below it.
3) The RSI has been stuck mostly between 40 and 60. This is a sign of consolidation. From this consolidation perspective, if the RSI hits 70, it will suggest bullish momentum, whereas if it hits 30, it would suggest bearish momentum.
(click to enlarge)
Here a 3 scenarios to look for after the inflation data:
Scenario 1: CPI y/y falls below 2.0%. If inflation pressure retreats, there would be less pressure for the FOMC to raise rates from their historical lows. In this scenario, the USD/JPY should feel the pressure and push toward the 100.75 support. Then, if this level breaks, we should expect a push toward the 100 psychological mark. A swing projection targets the 99.55 area.
If inflation rate does indeed fall below 2.0%, and price is up near 102, and the triangle resistance, look for a heavy sell-off toward 100.75. If it is already at 100.75, look for the break down, and a subsequent pullback to test the 100.75-101 area as resistance.
Scenario 2: CPI y/y advances above 2.1%. Another increase in the annual CPI inflation rate can provide impetus for the FOMC to consider a rate hike before mid-2015. In this scenario, expect the 2014-lows to hold up, and price to stay north of 101. Then, price action is likely focused toward the 102 handle, and the descending triangle resistance. Remain, unless price breaks above this triangle resistance, the bias remains bearish toward the 2014-lows. Strong inflation data might push USD/JPY higher in the short-term, but a break above the triangle resistance will be needed to open up the 103, and 104 resistance areas.
If the inflation data is strong, but price is testing 100.75, expect a rebound toward 102. If price is already testing 102, the strong inflation report can help it push above 102 and open up the 103 handle. Expect some near-term pullback to test 102 as support before looking for the short-term bullish outlook.
Scenario 3: Inflation report is a dud, and does not surprise. Inflation may be leveled around 2.0%, which is the target rate for the Fed anyway, so there should not be upward or downward pressure on the USD if that is the number reported tomorrow. This type of data should not be able to guide USD/JPY below 100.75 nor above 102.
These scenarios should give us some heads up on the possible development in the USD/JPY after tomorrow’s CPI data. It boils down to watching the 100.75 low on the year, and the 102, falling triangle resistance. If inflation data confirms the breakout direction, look for a short-term trend to develop outside of 100.75 and 102.
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