USDJPY expected to reverse lower as inflation differential tightens

[MongiIG]

USDJPY has been regaining ground this week, but inflation differentials and a three-month trend signal the potential for another turn lower

Source: Bloomberg

 

 

 Joshua Mahony | Senior Market Analyst, London | Publication date: Friday 27 January 2023 

USDJPY set for third monthly decline

The USDJPY pair has been on the slide since its October high, with the historical 147.63 resistance level ultimately marking the end of the dramatic 21-month rally that saw the pair gain almost 50%. Much of that came through a period that saw US inflation soar as Japanese prices remain subdued. That disparity remains, but the direction of travel has certainly shifted as US CPI declines and Japanese price growth gradually ticks up.

The overnight 4.3% figure for Tokyo core CPI represents a four-decade high, with the nationwide figures likely to follow on. The chart below highlights how USDJPY has been heavily correlated with the now tightening gap between US and Japanese inflation. However, it is more evident when shifting that inflation differential forward by seven-months. That close correlation highlights the potential for further downside as long as prices continue to trend in a similar manner.

Source: ProRealTime

Looking at the daily chart, the recent rebound has taken price up towards the top-end of a descending channel and Fibonacci resistance. This highlights the bearish pattern that has been playing out, with lower highs and lower lows in place in recent months. Unless we see price rise through trendline and 134.77 resistance, another turn lower looks likely for this pair.

Source: ProRealTime