USD/JPY Forecast: Weak US inflation may hurt Yen

Gone are the days when a better-than-expected US inflation number would boost the treasury yields, USD/JPY pair and vice versa.

Of late, fears of an overly aggressive Fed and the resulting rise in the bond yields have worked against equity markets (risk assets). Consequently, the USD/JPY has a hard time cheering a strong US data (Yen finds bids on risk aversion).

The market is looking for core CPI to ease to 0.2% m/m in February from 0.3% in January, and to remain at +1.8% on a y/y basis, according to a Reuters report.

An above-forecast headline CPI and core CPI would boost the odds of faster Fed rate hikes from the Federal Reserve and en up pushing the 10-year treasury yield to 3 percent -  a move that could rock the equity markets. Hence, the post-CPI uptick in the USD/JPY will likely be short-lived.

On the other hand, a weaker-than-expected CPI print would put to rest the fears of faster Fed tightening and push yields lower. So, the USD will likely take a beating against majors. However, the dip in the USD/JPY pair could be quickly undone, if the equities respond positively to the inflation-led drop in the yields.

As far as technical charts are concerned, the pair seems to have made a temporary low at 105.25, but only a close above 107.05 (March 9 high) would confirm a short-term bearish-to-bullish trend change.

Daily chart

Pair's rebound from the trendline support against the backdrop of the bullish 5-day moving average (MA) and the 10-day MA and the bullish RSI divergence strengthensthe bull case scenario. 

However, it is worth noting that Japanese political uncertainty could play a spoil sport. The Abe government is losing ground in polling due to the suspected land scandal and an emboldened opposition has stepped up calls for Finance Minister Taro Aso's resignation.  

So, a close above 107.05, though bullish, may not yield a big move higher as long as the Japanese political situation remains unstable.