Attempting a yen recovery | 13 February 2024

Event to watch out for today:

15:30 EET. USD - CPI m/m

USDJPY:

At the start of the Asian session on Tuesday, the USD/JPY pair is trading flat. The US Dollar (USD) is consolidating due to uncertainty over the timing of interest rate cuts. Traders are waiting for the US Consumer Price Index (CPI) data for January, which may provide some indication of when the Fed will begin cutting interest rates.

The Consumer Price Index (CPI) report on Tuesday is the most significant event to monitor. The forecast for Core CPI is a 2.9% year-on-year increase, down from 3.4% in December. Core CPI, which excludes volatile food and energy prices, is expected to be 3.7% year-on-year, a decrease from the previous 3.9%. Investors anticipate a gradual monthly increase of 0.2% and 0.3% for core and core CPI, respectively.

Before cutting rates, Fed officials require more evidence that inflation is steadily returning to the 2% target. Softer US inflation data may increase the Fed's confidence in the return of inflation to target, potentially putting pressure on the US Dollar and acting as a headwind for the pair. According to the CME FedWatch Tool, investors estimate an 84.5% probability of rates remaining unchanged in March, while the probability of a 25 basis point rate cut in May has fallen to 61% from over 95% in early 2024.

Regarding the Japanese yen, Bank of Japan (BoJ) Governor Kazuo Ueda stated last week that favourable financial conditions are likely to persist based on the bank's economic outlook, even if the BoJ stops cutting rates. Bank of Japan Deputy Governor Shinichi Uchida mentioned that it would be difficult to imagine the central bank consistently and quickly raising the discount rate, even after the minus rate regime ends. However, the Japanese central bank's comments could weaken the JPY exchange rate and restrict the decline of the USD/JPY pair.

Trading recommendation: Trade predominantly on Buy from the level of current prices.

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