USD/JPY Outlook: Cost Pressure Remains Despite Eased Inflation

• Core consumer prices in Japan increased by 3.1% from a year earlier in February.

• The cost of non-energy goods like food and basic necessities continued to rise.

• Investors are awaiting the core durable goods orders report from the US.

Today’s USD/JPY outlook is bearish. Data released on Friday revealed that while Japan’s core consumer inflation fell in February, an index that excludes energy costs reached a four-decade high.

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Analysts predict the data will maintain market expectations of a short-term adjustment to the Bank of Japan’s bond yield control policy.

According to government data, the core consumer price index, including oil products but excludes volatile fresh food, increased by 3.1% from a year earlier in February. This met the median market prediction and notably lowered from a 41-year high of 4.2% in January.

The government’s efforts to reduce utility costs through subsidies were mostly responsible for the slowdown. The cost of non-energy goods like food and basic necessities continued to rise, indicating that the rising cost of raw materials has not yet fully been passed through.

A different index that excludes the cost of fuel and fresh food saw a 3.5% increase from a year earlier in February. This is up from a 3.2% increase in January, underscoring the ongoing cost-push pressure.

The numbers show Kazuo Ueda’s difficulty in predicting whether cost-push inflation will change to a more persistent, demand-driven price rise or cool spending and stifle a weak economic recovery.

USD/JPY key events today

Investors are awaiting the core durable goods orders report from the US. This report will give a good measure of ordering trends and show the state of manufacturing activity.

USD/JPY technical outlook: Bullish divergence

The 4-hour chart shows USD/JPY in a well-developed downtrend, with the price making lower lows and lower highs. The price trades below the 30-SMA with the RSI under 50, indicating strong bearish momentum.

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However, a closer look at the RSI shows a weakening downtrend. The RSI has made a bullish divergence with the price, showing that bears are getting exhausted at new lows. This might result in a deep pullback or a reversal in the trend.

A break above the 30-SMA and the 132.55 resistance could point to a reversal. The bearish trend will continue if the price stays below the SMA.

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