- US dollar hovers around the psychological 93 areas in DXY following strong PPI.
- USD/JPY remains in a corrective phase and bears eye a test of 110.00/109.80.
At the time of writing, USD/JPY is trading at 110.43 and flat on the day, sticking within a narrow range of between 110.31 and 110.54.
The US dollar caught a bid on Thursday following data showing Producer Prices posted their largest annual increase in more than a decade in the 12 months through July, suggesting inflation pressures remain strong.
The producer price index (PPI) for final demand increased 1.0% last month after rising 1.0% in June.
In the 12 months through July, the PPI jumped 7.8%, a record high since the measure was introduced just over a decade ago.
The data was welcomed by the bulls following the prior day's moderating Consumer Price Index that took some heat out of the greenback.
The dollar index DXY, which measures the greenback against a basket of six rivals, printed a high back in the 93 area following PPI.
Additionally, other reports on Thursday have shown the number of Americans filing claims for unemployment benefits fell again last week which compliments last Friday's Nonfarm Payrolls strong outcome.
Investors are trying to second guess the Federal Reserve's next move as it prepares its timings on tapering of asset purchases as well as interest rate hikes.
''While US July CPI didn’t repeat its recent shocks, the booming payrolls report left even the Fed’s remaining doves conceding that QE tapering isn’t too far away,'' analysts at Westpac argued.
Meanwhile, analysts at Nomura are preparing clients for a stronger US dollar environment.
"We do not believe the market is prepared for a September tapering announcement," analysts at the bank said in a report on Thursday.
Nomura believes that the Fed will achieve its inflation and employment goals by September, sooner than what the markets are pricing for in November or December.
"It is conceivable that Fed Chair Jay Powell will start to prepare the markets for tapering at his Jackson Hole speech, followed by a formal taper announcement at the September FOMC meeting," they said.
Nomura recommends going long the dollar against the yen, expecting USD/JPY to reach 113-114, with an overshoot to 115 possible, as the Bank of Japan maintains its dovish stance.
USD/JPY technical analysis
Meanwhile, from a daily outlook, there could be a right-hand shoulder of a reverse head and shoulders in development, longer-term bullish pattern but near term bearish to test 110.00.
This would require some meanwhile consolidation in the greenback as investors monitor economic data developments and the responses from global governments and central banks to the coronavirus.
This leaves scope for a reversion in USD/JPY over the coming weeks into the Jackson Hole event between Aug 26-28.
The price points of interest accumulate around the 50-day EMA, the 38.2% Fibonacci retracement level and the 50% mean reversion target.
The 38.2% Fibo will be a big test for the bears as it has a confluence of the round psychological 110 number.
Thereafter, the 50% target has a confluence with the neckline of the slanted W-formation near 109.80 which could be the last defence where accumulation will lead to a longer-term move to the upside.
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