The U.S. dollar jumped sharply after U.S. inflation figures for April turned stronger than markets had expected, leading to warnings that it could be a while before price increases start to slow. As a result, the price of the USD/JPY currency pair has held steady around and above the psychological resistance at 130.00, which is driving the currency pair to its 20-year high. In early trading this week, the currency pair surged towards the 131.35 resistance before stabilizing around the 130.00 level at the time of writing.
According to official figures, headline consumer price index inflation in the United States rose 8.3% on an annual basis in April, beating the agreed forecast of 8.1%. The figure is lower than 8.5% in May. But it was this victory over expectations that moved markets and saw the dollar rise rapidly as investors bet the Fed would remain vigilant and proceed with a series of US interest rate hikes.
Core US CPI inflation rose 0.6%, doubling the rate of 0.3% recorded in May, but was slightly above expectations of 0.2%. Commenting on the figures, Richard Carter, head of fixed rate research at Quilter Cheviot, said: “It is too early to declare victory with inflation likely to remain elevated for some time to come, while oil prices energy could also increase if the war in Ukraine escalates.”
Carter adds that while inflation in the United States has hopefully peaked, other countries cannot say the same, and it has become a global problem. Prior to the inflation release, money markets were pricing the Fed’s rate hike at nearly 200 basis points in 2022. The numbers will at least support this expectation. Concerns about global economic growth are rising due to the rapid pace of Federal Reserve tightening, which is effectively draining liquidity from the United States and the global economy.
The US economy will inevitably begin to slow as the combination of slowing global growth and rising financing costs takes effect.
The US Dollar Index (DXY) hit a new 20-year high this week on lingering expectations of quick Fed tightening and fears of a global economic slowdown that tends to benefit the countercyclical dollar. The index is a measure of the overall strength of the US dollar based on several key dollar exchange rates. jumped on the heels of the inflation numbers and reaffirms that the weakness is likely to be seen as temporary in this environment.
According to the technical analysis of the pair: Looking at the performance of the USD/JPY currency pair on the daily chart, it seems clear that the bullish control of the trend has approached the top. Markets absorbed all events supporting the dollar by raising interest rates and the results of major economic publications and US technical indicators reached overbought levels. This may be the strongest profit selling opportunity and a trend reversal. Moving in tight ranges for several consecutive trading sessions portends a strong move ahead.
The closest targets for the bulls are 130.65 and 131.30 respectively. The first trend change needs to move towards the 128.65 and 126.70 support levels, respectively.