USD/JPY Price Analysis: Soft CPI Dims BoJ Rate Hike Prospects

• Japan’s core CPI rose 2.2%, a smaller increase than the 2.6% reported in March.

• The BoJ might not be ready to hike interest rates in June or July.

• The dollar surged on Thursday after data showed robust business activity in May.

The USD/JPY price analysis shows more upside potential for the pair as Japan’s soft inflation figures lower the chances of a BoJ rate hike. Meanwhile, the dollar was heading for its most significant weekly gain in over two months after data showed strong business activity in May.

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Japan’s core inflation slowed further in April, challenging the Bank of Japan’s outlook for rate hikes. The core CPI rose by 2.2%, a smaller increase than the 2.6% reported in March. As a result, the BoJ might not be ready to hike interest rates in June or July. Policymakers have been waiting for more sustainable domestic consumption, with inflation well above the central bank’s target. However, most economic indicators point to weak consumption.

Notably, Japan’s economy shrank by 2% in the first quarter due to poor demand. If consumption remains fragile, the BoJ will hesitate to hike interest rates, and the gap in rates between the US and Japan will remain wide. This could mean further weakness for the yen. 

Meanwhile, the dollar surged Thursday after data showed robust business activity in May, lowering Fed rate cut expectations. The US Composite PMI rose from 51.3 to 54.4 in May, indicating a resilient economy despite high interest rates. As a result, there was uncertainty about the outlook for rate cuts in the US.

USD/JPY key events today

• Revised UoM Consumer Sentiment

USD/JPY technical price analysis: Bulls weakening below 157.00

On the technical side, the USD/JPY price is trading in a thin range after breaking above the 156.50 key resistance level. Nevertheless, the bias is bullish because the price sits above the 30-SMA, and the RSI trades slightly below the overbought level.

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However, bulls are exhausted, as seen in the shallow slope of the current move. Moreover, the price is sticking close to the 30-SMA, a sign that bulls are not committing to significant swings. If this shallow trend continues, the price will retest the 158.01 resistance. However, if it reverses, the price will break below the SMA and the 156.50 level.

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