Will Today’s US CPI Inflation Send USD to 140?

USDJPY has been bearish since early August, but has found support above 142, however today  US inflation CPI might send this pair down there. However, risks are skewed for both sides, so we will be following closely the August inflation report and analyze it when it is released.

Our analysis points to potential gains in risk assets and a decline in the U.S. dollar, with USD/JPY possibly heading toward the 140 level. A miss on the downside for CPI would likely accelerate this trend, emphasizing that inflation pressures are easing, while an upside miss would put pressure on the Fed to continue tightening, although the impact of oil and raw materials prices may moderate such concerns.

USD/JPY Movement Amid Risk Sentiment

In early August, the USD/JPY pair dropped below 142 as risk sentiment soured in the financial markets. However, the pair soon recovered. Yesterday, sellers regained control, pushing the pair back to 142, and a further break below this level seems likely. Although the Bank of Japan (BOJ) recently raised interest rates, officials have made it clear that they don’t intend to hike them further. In contrast, the Federal Reserve is preparing to begin a policy easing cycle, though the extent of rate cuts will depend on key inflation and employment data, with the August CPI release being closely watched. Diverging central bank policies are creating mixed signals for the USD/JPY pair.

CPI Data and Market Expectations

While significant market movement was anticipated in response to the upcoming CPI data, inflation has been steadily falling, with prices nearing target levels. As a result, the market reaction has been somewhat muted. Nevertheless, this week’s most critical data release remains the CPI inflation rate, which continues to drive market sentiment. The FOMC decision on September 18 could heighten the impact of this CPI report, especially as the market struggles to predict whether Chair Powell will opt for a 25 bps or 50 bps rate hike. Currently, pricing suggests a 33% chance of a 50 bps increase, but if both headline and core inflation numbers undershoot expectations, that likelihood could rise to 40%.

CPI Predictions and Market Impact

The headline CPI is expected to rise by +2.6% y/y and +0.2% m/m, with the latter being the lowest rate since 2021. However, the more significant focus is on core CPI, which excludes food and energy. Core inflation is projected at 3.2% y/y and 0.2% m/m, with the continued slow rise in rent and property prices contributing to these figures. A weaker-than-expected core CPI could weigh heavily on the USD and push the USD/JPY down to the 140 level.

Fed’s Focus and Broader Implications

The Fed is also monitoring “supercore” inflation, which excludes housing. In July, it remained elevated at 4.5% y/y, indicating persistent inflationary pressures in goods. However, if CPI data surprises to the downside, it could signal to the Fed that inflation is no longer a pressing issue, which would be bearish for the USD. This scenario would likely support risk assets, further weakening the USD and increasing the odds of a Fed pivot toward a 2% inflation target this year.

USD/JPY Live Chart