The dollar/yen pair has been trading sideways for the third session in a row, waiting for a trigger. Most analysts suppose that the pair will leave the channel as early as today after the publication of the US inflation figures. However, it is hard to predict in what direction the pair will move.
The current dynamic of the dollar/yen pair
Since the end of last week, USD/JPY has been stuck in the price corridor of 134.69-135.36. The currency pair failed to develop an upward momentum after Friday's optimistic NFP report because of the increased pressure on the dollar.
At present, the US currency is negatively affected by two factors: the unresolved situation with the US public debt and growing market expectations regarding a possible pause in the current Fed tightening cycle.
Despite attempts made by US President Joe Biden to bring Republicans and Democrats to a compromise on the debt ceiling issue, congressional leaders still cannot reach an agreement.
Analysts warn that the unresolved issue could result in an unprecedented default for the United States. This would have catastrophic consequences for the country's economy and would undermine its national currency.
"There is real risk to the US dollar," said Beth Hammack, the co-head of the global financing group at Goldman Sachs Group Inc. "Anything that moves us away from being viewed as the world's reserve currency, of being the safest most liquid asset in the world, is bad for the American people, bad for the dollar and bad for the US government."
Another serious threat to the American currency is a possible change in the Fed's aggressive policy. Speculations about this issue flared up again after the US central bank raised interest rates by 25 basis points last week but remained silent on the need for further tightening.
Currently, futures markets estimate a nearly 90% probability that the Fed will keep interest rates in the existing range next month.
However, some American politicians suppose that the hawkish stance will remain unchanged. Yesterday, New York Fed President John Williams hinted that US interest rates could rise even more if necessary and were unlikely to be lowered this year, given still high inflation.
The official also emphasized that the regulator's further steps would depend on incoming data. In this regard, today's release of consumer price growth data in the US for April should be the most important event for currency traders.
How can inflation figures affect USD/JPY?
This time, most economists do not predict a significant slowdown in US inflation as the Fed has significantly reduced the pace of tightening. This, in turn, could decrease the effectiveness of its fight against rising prices.
Analysts suppose that last month, annual consumer inflation remained at the previous level of 5%, and the core CPI, which excludes volatile food and energy prices, decreased slightly in annual terms (from 5.6% to 5.5%).
To see the real changes in inflation, investors should turn their attention to monthly indicators. According to estimates, the consumer price index and its core component increased by 0.4% in April.
If the forecast comes true and we see considerable changes in inflation on a monthly basis, it may force investors to reconsider the prospects of further monetary policy of the Fed and expect an additional rate hike in June.
Under such a scenario, the US dollar is likely to resume gaining in value in the near term. The USD/JPY pair could benefit most from stronger hawkish market expectations. According to the most optimistic forecasts, the pair will end the 3-day consolidation with a break above the round figure 136.
On the other hand, lower-than-expected monthly inflation figures may reassure traders that the Fed will pause tightening at the June meeting.
In such a scenario, sellers would increase pressure on the dollar against all the currencies, including the yen. According to the most negative estimates, the USD/JPY asset may fall in the short term to around 133.
Conclusion
Regardless of what the US inflation data turns out to be, the USD/JPY pair will show a strong reaction. Most analysts expect a surge in volatility and predict a break of the current consolidation.
Given the presence of an additional negative factor for the dollar (the US government debt crisis), many analysts believe that the fall in the currency will be more intense.