USD/JPY Hits New 34Year Highs after Another Hot US Inflation Print

USD/JPY Analysis

Today's data showed an acceleration in price pressures in March, as CPI rose by 3.5% y/y and the fastest pace in half a year. Stubborn inflation raises the bar for a Fed pivot, which has already adopted a conservative approach around such moves, given also strong economy and robust labor market.

Markets reacted immediately, by pushing back the timing and extent of lowering rates. CME's FedWatch Tool now assigns the highest probability to the first move taking place in September (form June previously) and rates ending the year 50 bps lower. ^[1]

The hot CPI report and the subsequent hawkish repricing around the Fed's policy path, boosts the greenback and sends USD/JPY to new thirty-four year highs. This bring 155.75 in the spotlight, but it may prove elusive, at least in the near term.

The Bank of Japan abandoned nearly a decade of unorthodox loose policies, but has maintained an accommodative bias. As a result, the ailing Yen has failed to recover, especially as the Fed appears hesitant to remove monetary restraint. However, the BoJ raised rates last month and it is reasonable to deliver at least another hike within the year, while the Fed is still expected to cut them.

This differential can eventually weigh on USD/JPY, while the new peak raises the risk of an FX intervention by Japanese authorities. Furthermore, the RSI moves to overbought territory and we can see a pullback to the EMA200 (150.50). Daily closes below it that would pause the bullish bias will need a catalyst though and the downside appears well protected.