USD/JPY Cautious Below the Recent 24-Year High, as Japan’s Inflation Remains Elevated

USD/JPY Analysis

Today's data showed that inflation in Japan remained elevated and above the central bank's 2% target for second straight month. The Consumer Price Index, excluding fresh food, was 2.1% in May year-over-year, which is the same as the prior reading and the highest since March 2015.

Despite this recent surge in inflation, the Bank of Japan (BoJ) has not deviated from its expansionary monetary strategy, which has created massive Yen weakness. In last week's policy decision, it maintained its strategy of monetary easing, but made a rare FX reference - albeit a rather soft one.

The BoJ is getting isolated, since most of its major counterparts have been aggressively moving towards monetary tightening. The USD delivered a historic 75 basis points rate hike this month, which was the biggest in nearly 30 years, after the resurgence in CPI inflation.

This week, Chair Powell largely reaffirmed the Fed's commitment to bringing inflation down, while Governor Ms Bowman supported an additional 0.75% move in July and hikes "of at least 50 basis points in the next few subsequent meetings". ^[1]

The policy divergence between the two central banks has led to a USD/JPY rally this year, which culminated to fresh nearly 24 year high on Wednesday, after a shallow correction, as per our last analysis.

The latest Fed commentary however has not added anything more hawkish and today's inflation figures put more pressure on the BoJ for a rethinking of its strategy.

USD/JPY slides after the recent high and we could see further pressure, but a deeper correction below the EMA200 (131.70-48) will need a strong catalyst.

Despite current softness, bulls are clearly in the driver seat and have the ability to take another crack at 136.92, but an extension of the rally past 139.29, does not look easy at this stage.