The USD/JPY pair is poised for a volatile week as US inflation data takes center stage, with Wednesday's Consumer Price Index (CPI) and Thursday's Producer Price Index (PPI) reports 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 driving the pair's movements. This complicates the outlook, as short-term correlations show a strong connection between USD/JPY and riskier assets like the S&P 500 and VIX futures.
September's CPI report is anticipated to show headline inflation rising by 0.6%, with core inflation increasing by just 0.2%. Meanwhile, core PPI inflation has been running hotter, with the three-month annualized rate at 3.36%. However, the predictive relationship between PPI and CPI has weakened since 2023.
The USD/JPY pair has been trading in a narrow range, with dips towards 157.50 being bought and offers capping moves above 158.45. The pair is currently playing between the 50-day and 200-day moving averages, with momentum indicators providing little directional bias. Key levels to watch include 156.40 on the downside and 159.00 on the upside.