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US-Japan inflation differentials highlight bullish USD/JPY case


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US-Japan inflation differentials highlight bullish USD/JPY case

USD/JPY looks to break through to multi-year highs as US-Japan inflation differentials highlight potential for further upside.

BG_jpy_yen_japan_usd_dollar_234324234234Source: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Thursday 18 November 2021 

Japanese inflation data released tonight looks set to highlight the huge disparity between US consumer price index (CPI) and that in Japan.

With headline CPI in Japan currently residing at 0.2% (US : 4.6%), the ratio between US and Japanese inflation has spiked to the highest level seen since 2012. Interestingly, we can see that the ratio between US and Japanese inflation can provide a good gauge on direction for the USD/JPY currency pair.

A five-year outlook below highlights exactly that, with the spike in US inflation causing a major appreciation in USDJ/PY as traders consider the differing monetary policy outlook in the two nations.

CPI_to_USDJPY.pngSource: Refinitiv

 

With the US continuing to experience elevated inflation, we are seeing some talk of the Federal Reserve (Fed) potentially bringing forward rate hikes and tapering timelines. That could bring further gains for the USD/JPY in turn.

Notably, we have seen the pair rise into the crucial 114.73 resistance level, which would likely bring further gains if broken.

USDJPY-Monthly-2021_11_18-16h19.pngSource: ProRealTime

 

From a four-hour perspective, we can see how the pair has pulled back in the wake of a break through that 114.73 resistance level.

While we did see an initial push into four-year highs, we appear to be in retracement mode once again. As such, bullish positions are favoured for a breakout follow through, with a decline below 113.75 required to signal a wider pullback coming into play.

USDJPY-4-hours-2021_11_18-16h25.pngSource: ProRealTime
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