USD/JPY slides back below 50DMA and 113.50 mark, but broadly rangebound as US inflation looms

USD/JPY slipped back below its 50-day moving average, which resides just above 113.50, on Thursday, with FX markets trading in tentative, rangebound fashion ahead of Friday’s key US November inflation report and next week's central bank bonanza. The pair currently trades lower by about 0.2% on the day, with the yen sitting at the top of the G10 performance table amid a slightly more risk-averse tone to broader trade. Stocks in Europe and the US are mostly a little lower, as is oil. But at current levels just under 113.50, the pair is trading roughly at the mid-point of this week’s 113.00-114.00 range.

USD/JPY continues to trade largely as a function of movements in US bond markets, particularly in the 10-year yield. 10-year yields started the week under 1.40% but rallied to hit 1.54% on Wednesday, before pulling back to around 1.50%. That broadly mirrors USD/JPY’s rally from 113.00 to 114.00 at the start of the week than the more recent retracement back to the mid-113.00s.

Technical factors have also been at play for USD/JPY with the 21-day moving average on Wednesday providing solid resistance just under 114.00 and in the end capping this week’s price action. Much stronger than expected US initial weekly jobless claims numbers on Thursday, which dropped to their lowest since 1969 at 184K, failed to stir the price action on Thursday with focus on Friday’s inflation data. US Consumer Price Inflation is seen rising to 6.8% and some are calling for an above 7.0% reading.

The Fed

The Fed has grown increasingly uncomfortable with inflation at such elevated levels, hence why Fed Chair Jerome Powell said the description “transitory” would be dropped and said it would be appropriate to discuss speeding the QE taper at next week’s meeting. Markets now fully expect the bank to announce plans to accelerate the pace of its QE taper next week, while the tone on inflation and the potential path for rates will be closely eyed, as will the bank’s updated economic projections and dot-plot. As inflation persists at elevated levels, and with FOMC members for now seeing Covid-19 variant risks as more inflationary than anything else, risks are clearly tilted towards the bank opting to start hiking rates sooner rather than later.

USD/JPY is more sensitive to longer-term US yields, which is more sensitive to long-term growth and inflation expectations, rather than the short-end, which is more sensitive to short-term interest rate expectations. If high inflation on Friday triggers hawkish Fed vibes and then the Fed backs this up next week, the US treasury curve is at risk of further flattening (short-end yields up, long-end yields down) like was seen last week – a potential reflection of investor concern that a more prompt Fed tightening to tackle near-term inflation will damage the already shakey (as a result of Omicron) long-term economic outlook. This could weigh on USD/JPY and send it back to recent 112.50 lows.