FX.co ★ Happy end or game over: 2 scenarios for USD/JPY after the release of US inflation data

Today, those who are trading the dollar-yen pair are focused on US inflation data. This will become a key trigger for the major pair and will determine its further dynamics.

The dollar does not lose hope

America has been ahead of the curve this year in terms of interest rate hikes. This helped the dollar, which showed impressive growth across the board.

However, the greenback has retreated from its multi-year highs in recent weeks as many investors opted to take profits after its extended rally.

The USD sell-off was also fueled by increased speculation that the Federal Reserve may soon move to less hawkish action and thereby deprive the dollar of key support.

Up until yesterday, the market looked as if the slowdown in US tightening was a done deal. For several sessions, the greenback showed signs of weakness across the board, but suddenly reversed sharply to the upside.

On Thursday night, the DXY index jumped 0.8% and settled above the level of 110. The main springboard for the dollar was the release of US inflation statistics for October.

Economists predict that the headline consumer price index will show a marginal slowdown year-on-year (from 8.2% to 8.0%), while the more important core CPI could remain in roughly the same range as a month earlier, at level of 6.5%.

More stable inflation is likely to offset market fears that the Fed will begin to reduce the degree of aggressiveness in relation to interest rates.

If traders become more confident in the hawkish determination of the US central bank, it will serve as a great driver for the dollar on all fronts, but especially against the yen.

Some analysts suggest that, in the event of strong US inflation data, USD/JPY could resume its impressive rally. But such an outcome of events, to be honest, is hard to believe.

Despite the fact that the dollar has much more fundamental trump cards in its hands, the Japanese currency is surprisingly doing well. This inspires optimism about its future prospects.

USD/JPY doomed?

Recall that this year the yen has sank more than other currencies from the Group of 10 relative to the greenback. The blame for everything was a serious discrepancy in the monetary policy of the Bank of Japan and the Fed.

Unlike its counterpart, the BOJ is dovish and keeps interest rates ultra-low. This tactic has brought the yen down to multi-year lows this year.

The biggest anti-record of the yen was the fall to 151.95, followed by a response from the Japanese government. Japan's Ministry of Finance re-intervened last month, spending $43 billion to buy the yen.

The latest intervention had a much larger effect than similar measures to protect the JPY in September.

See for yourself: since then, the yen has survived another dovish decision by the BOJ, as well as another sharp rate hike in America, but has not collapsed again to critical levels. It is currently trading around 146.

Undoubtedly, the intervention was not the only thing that helped the Japanese currency to strengthen, but there were also fundamental circumstances – the growth of speculations about a possible slowdown in the rate hike in the US.

Such an explosive mixture has given so much strength to the yen that now just one drop of doubt in the hawkish determination of the Fed is enough - and the JPY can soar even higher.

Many analysts believe that today's US inflation data may well be the very last straw. If the market sees clear signs of lower inflationary pressures, this will finally convince traders that the Fed will slow down the pace of tightening at its next meeting.

By the way, now the probability of a rate hike by 75 bps in December is only 38.5%. If it falls even lower after the release of the CPI, this will greatly undermine the dollar's position on all fronts, and especially against the yen.

Moreover, some experts believe that the JPY has a brighter long-term outlook than the greenback, even if we now face stronger inflation data.

Of course, in this scenario, the dollar will certainly rise, but its growth against the yen will again be severely limited by the risk of intervention.

In addition, most analysts do not believe that the USD rise will last long. The chief strategist of Scotiabank, Shaun Osborne, believes that the bullish cycle for the dollar is almost over and the currency will be prone to further weakening.

Be that as it may, inflation in the US is already starting to slow down. It is unlikely that the Fed will need to bring rates to the level of 5.25% or even higher, thereby exacerbating the situation in the economy.

Experts believe that, by and large, the dollar's song has already been sung. But a stage of gradual recovery begins for the yen.

Despite the BOJ insisting it will stick to its ultra-loose policy, many traders are starting to bet on a change in the regulator's rate after the current head of the BOJ steps down next April.

According to market participants, even a small signal from the central bank that it is considering the possibility of normalizing policy is likely to lead to a strong rise in the yen.