US Dollar, USD/JPY, CPI Talking Points:
- The US Dollar has set a fresh yearly high this morning although there hasn’t yet been significant traction beyond a key Fibonacci resistance level.
- Tomorrow brings the release of CPI and after last month’s moderation, the expectation is for a flat read mirroring last month’s 4% core and 5.3% headline CPI read.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
The big US Dollar driver for the week is set to be unveiled tomorrow at 8:30 am et. This is when we’ll get updated CPI numbers for the United States and this will be the last such release ahead of the FOMC’s November rate decision, at which they’re expected to announce the start of tapering asset purchases.
The Fed opened the door for earlier-than-expected rate hikes at their last meeting in September, but they also avoided a taper announcement while saying that they wanted to see some additional progress with employment numbers. And despite a disappointing NFP release last week, bond markets have continued to price in the expectation for the Fed to move away from less loose policy in the near-term.
In the FX world, this has amounted to two very visible themes: US Dollar strength and Japanese Yen weakness, creating a strong breakout in USD/JPY that’s seen the pair jump up to fresh two-year-highs. This also seems to be brought upon by fears that inflation may remain ‘less transitory’ than the Fed had hoped in the coming months, and tomorrow brings a really big driver to the fray with the release of CPI numbers.
In the US Dollar, bulls appear to be losing patience waiting around for tomorrow’s inflation release. Despite spending the first 10 days of October trade building a symmetrical triangle, which when meshed with the prior bullish trend makes for a bull pennant, buyers are pushing price above the wedge to elicit sellers from Fibonacci resistance at the 94.47 level.
This is the 38.2% retracement of the 2020 sell-off and, so far, it’s held the highs in the US Dollar as traders gear up for the start of a pivot at the Fed.
US Dollar Hourly Price Chart
Taking a step back on the chart for some additional context, and some additional levels come into view. Sitting above current price action, around the 96 handle on DXY are a series of additional resistance levels. This is something that can be followed for longer-term targets should this theme continue. But more pressing to the current matter is resistance at 94.47 and whether bulls can finally take this out. This presents breakout potential in the Greenback going into tomorrow’s CPI release.
US Dollar Daily Price Chart
USD/JPY Approaches a Big Spot of Resistance
Going along with the USD-strength theme has been a similar rates-driven theme of Yen-weakness. USD/JPY is fast approaching a big spot of resistance that currently houses the three-year-highs in the pair. This plots around the 114.00 handle, which is the 23.6% Fibonacci retracement of the 2012-2015 major move in the pair. This price then went on to set resistance for a large part of 2017 and 2018, as well.
USD/JPY Weekly Price Chart