The USD/JPY pair is navigating its 200-day moving average (200DMA) as traders await the release of the U.S. inflation report, a critical event that could dictate the pair’s next direction. A robust core inflation reading could drive U.S. bond yields higher, supporting a further rally in USD/JPY. Conversely, a softer-than-expected print may curb gains and open the door to renewed selling pressure.
USD/JPY Tests Key Technical Level
USD/JPY is hovering near its 200DMA, supported by a bullish breakout and a rise in U.S. bond yields. Technical indicators point to heightened volatility as the U.S. inflation report later today could act as a catalyst. If yields rise, USD/JPY could swiftly revisit highs last seen during the U.S. presidential election period.
Bond Yields at the Core of USD/JPY Moves
The pair’s strong correlation with U.S. Treasury yields, particularly the five- and 10-year benchmarks, remains a defining factor. Over the past month, these correlations have averaged 0.94, underscoring the pair’s sensitivity to U.S. economic data and monetary policy outlooks. In contrast, Japanese bond yields have had little impact on USD/JPY movements.
Treasury Futures Signal Potential Yield Upside
While predicting the direction of U.S. Treasury yields ahead of key economic data is challenging, futures trends offer clues. After a strong rally in November, U.S. Treasury futures have shown signs of fatigue, with momentum indicators such as RSI and MACD turning bearish. A weak inflation print could stabilize futures, but a strong reading may push yields higher, reinforcing the positive correlation with USD/JPY.
Inflation Data: A Key Market Catalyst
All eyes are on the core inflation figure, which excludes volatile food and energy prices. The core CPI is expected to rise by 0.3% in November, maintaining the pace seen over the past three months. Annualized, this translates to 3.6%, well above the Federal Reserve’s 2% target.
A stronger than expected core reading, particularly if not driven by shelter costs, could force markets to reconsider expectations for multiple Fed rate cuts next year, driving yields higher across the curve and supporting USD/JPY. Conversely, a weaker print would likely have the opposite effect, tempering bond yields and putting pressure on the pair.
Technical Outlook for USD/JPY
On the daily chart, USD/JPY is testing the upper boundary of a symmetrical triangle it broke out of earlier this week. A sustained break above the 200DMA could pave the way for a retest of 153.38, a level that has acted as both support and resistance in the past. Further resistance levels are seen at 155.89 and 156.75.
However, failure to break above the 200DMA could set up bearish opportunities. Short positions might target triangle support around 150.25 or deeper levels near 148.65. Traders are likely to use the 200DMA as a key reference point for stop-loss placement and trade entry decisions.
With inflation data poised to set the tone for markets, USD/JPY’s path will hinge on how bond yields react, making today’s report a pivotal event for traders.
