The upcoming week is crucial for the USD/JPY pair as US inflation data takes center stage. The focus will be on Wednesday's Consumer Price Index (CPI) and Thursday's Producer Price Index (PPI) reports, which are expected to influence Treasury yields and broader risk appetite. Markets are currently pricing in more than three Federal Reserve rate hikes by the middle of next year, despite recent signs of disinflation.
The relationship between USD/JPY and US Treasury yields has weakened recently, suggesting that risk appetite may play a more significant role in the pair's movement. Over the past five sessions, USD/JPY has shown a stronger correlation with the S&P 500 and VIX futures than with Treasury yields. However, this trend may not be sustainable, as historical data indicates that interest rate differentials and carry trades typically have a more significant influence on the pair.
USD/JPY has been trading in a narrow range, awaiting a catalyst. The pair has been bouncing between moving averages, with support at 157.50 and resistance at 158.45. Momentum indicators are not providing strong directional signals, leaving traders to watch key levels for potential breakouts. On the upside, resistance levels include 159.00 and 159.50, while on the downside, support levels are at 157.00 and 156.40.
In Japan, the economic calendar is quiet, with only remarks from Bank of Japan board member Junko Koeda potentially influencing market pricing. The Fed, on the other hand, has several speakers scheduled, including Governor Christopher Waller and former Fed Chair Kevin Warsh. However, their remarks are unlikely to provide explicit forward guidance.