Inflation Outlook has Improved Thanks to Recent Developments
A virtuous relationship between wages and prices is one of the prerequisites for further rate hikes but officials will most likely want to see more progress on this front. All three measures of Japanese CPI have turned lower on a year-on-year basis but recent developments from the monthly data reveals an encouraging uptick. CPI however, remains above the 2% marker identified by the BoJ and while that remains the case, conversations around commensurate wage growth is likely to continue. Policy setters will also be encouraged by the recovery in retail sales, although this data point can be very volatile and other indications of an uptick in local demand will likely be relied on for a better picture of consumer strength.
Japanese Inflation Profile
Source: Refinitiv, prepared by Richard Snow
Japanese Wages Recovered in April after Disappointing in March
Japanese wages rose in April to 2.1% beating estimates of 1.7% and smashing the prior reading of 1%. The Bank is trying to guide inflation and wages higher to meet the threshold for further rate hikes. Progress has been slow and hence officials are likely to insist on waiting for future data before making any alterations to interest rates. Both wages and inflation appear to have formed cycle peaks and the Bank of Japan will be looking to reignite both readings sooner than later.
Source: Refinitiv, prepared by Richard Snow
USD/JPY Fails to Capitalise on Weaker US CPI as Levels Remain Elevated
USD/JPY initially dropped after US inflation data suggested the disinflationary process was back underway. Most of the yen’s gains were erased hours later after the Fed removed two of their three anticipated rate cuts for 2024 at its June meeting.
Weekly USD/JPY Chart
Source: TradingView, prepared by Richard Snow
The pair continues to trade near the recent swing high, well above the 50-day simple moving average (SMA), which has acted as dynamic support. USD/JPY could drift higher give the Fed envisions the rate differential between the two nations is likely to remain at the current wide levels for some time to come still.
Support rests at the 50 SMA and the 155.00 marker with resistance appearing at the May swing high at 157.70.
USD/JPY Daily Chart
Source: TradingView, prepared by Richard Snow
Learn the ins and outs of trading USD/JPY - a pair crucial to international trade and a well-known facilitator of the carry trade
