After several unsuccessful sessions, the USD/JPY finally took a breather. The pair is now trading sideways, waiting for the US inflation report. Tomorrow, the dollar should get out of the stupor, but we don't know which way it will bounce.
The dollar looks surprisingly stable at the middle of the working week. The dollar is ignoring downward pressure from rising stocks and declining 10-year US bond yields.
Risk appetite improved after Federal Reserve Chairman Jerome Powell gave no hints about the central bank's policy during his speech at the Sveriges Riksbank International Symposium in Stockholm.
Also, the recent rally was fueled by optimism over China's reopening.
Increased demand for risky assets had a negative impact on 10-year US Treasury bond yields. After a recent 10 bp increase yesterday, the index fell from 3.61% to 3.58%.
The sharp decline in US bond yields, which usually causes the Japanese yen to rise against the dollar, did not cause such a reaction this time. Now the pair is waiting for a more powerful trigger - the release of the US inflation report.
Investors are hopeful that tomorrow's report will shed light on the Fed's future policy. If it confirms the downtrend in consumer prices in the country, it would dampen the market's hawkish expectations for the central bank's future actions.
Such a scenario could send the dollar into a deep spin on all fronts, also against JPY.
Should the market see signs of more stable inflation, it would reinforce traders' view that the Fed has a lot of work to do before the price pressure finally dissipates.
On a wave of optimism about further rate hikes in America, the greenback could show gains on all fronts, including against the yen.
Let's see what economists are expecting from tomorrow's US inflation data. According to preliminary estimates, last month's annual consumer price index could fall to 6.5% from the previous value of 7.1%.
If we do indeed see such a significant easing of inflationary pressures, the dollar is likely to be doomed to fall further.
"Another downward surprise to the core CPI would cement the deceleration trend. The US currency would ease further," Commonwealth Bank of Australia strategist Joe Capurso said.
The US currency would ease further because another weak core CPI would encourage markets to continue shifting bets for the Fed's February meeting from a 50 basis point hike to a 25 bp increase," Capurso said.
Traders now estimate the probability of such a scenario at 77.2%, while the likelihood of a 50 bp rate hike is just 22.8%.
Considering all the existing risks, most analysts are inclined to believe that in the short term the current dollar flat will change into a bearish trend.
One of the main beneficiaries of the next huge sell-off should be the yen, which may receive additional support in the coming days.
Currency strategists at Commerzbank are predicting that the Japanese currency will strengthen against the dollar as we approach next week, as the Bank of Japan are set to meet over monetary policy.
After the BOJ took an unexpected hawkish step in December by adjusting its bond yield control policy, many traders are now wondering how far the central bank can go.
"We may have an answer very soon. Next week's BOJ meeting promises to be very exciting," says Commerzbank analyst Antje Praefcke. "If the central bank throws another surprise, it will lead to a sharp jump in the yen. I would not be surprised if USD/JPY falls below 130."
As we see, the current consolidation of the USD/JPY asset will not be prolonged. Analysts expect higher volatility in the coming days. Most experts are inclined towards the major decline, but a positive scenario should not be completely ruled out.
If tomorrow's US inflation report turns out to be stronger than forecasted and the BOJ confirms its status quo next week, the pair may go off the rails.