USD/JPY Forecast: Bears in control unless OPEC boosts oil prices (inflation expectations)

Omkar Godbole FXStreet Contributor

The chart below clearly shows the USD/JPY pair is closely following the rise in the US inflation expectations.

The US long-term inflation expectations as represented by the 10-year breakeven inflation rate bottomed out in Feb 2016 and the subsequent rally gathered pace in July 2016.

It is worth noting that the oil prices bottomed out in Jan/Feb 2016, while the Chinese PPI bottomed out in July/Aug 2016.

China PPI, the main driver of the reflation story, seems to have topped out given the crackdown on the leverage. Trump trade has long fizzled out. So the burden of lifting the inflation expectations is on the OPEC and non-OPEC members.

Markets have seen oil near $60 on a few occasions in 2016. So a rally in oil back to near $60 levels won’t be a new thing and may not boost inflation expectations significantly.

The OPEC would have to beat market expectations, leading to a rise in the oil prices above $60 levels. Such a move would lift inflation expectations and the USD/JPY pair.

If OPEC fails to deliver, the inflation expectations would slide further, pushing the USD/JPY pair back to the recent low of 108.13.

USD/JPY weekly chart

The falling top formation plus the bearish MACD and RSI nicely positioned at the neutral territory suggests the bears remain in control.
A failure to take out 111.60 (Feb low) followed by a break below 111.00 would open doors for a revisit to 108.13.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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