USD/JPY Outlook: Dollar Tumbles Following Downbeat GDP

• The US economy grew at an annual rate of 1.3% in Q1, down from 1.6%. 

• Investors are gearing up for the US core PCE price index.

• There was an increase in core consumer inflation in Tokyo.

The USD/JPY outlook shows a slight bearish tilt as the dollar declines after weaker-than-expected GDP data and ahead of inflation figures. Meanwhile, Japan’s inflation numbers showed a mixed picture, complicating the outlook for Bank of Japan rate cuts.

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Data on Thursday revealed that the US economy grew at an annual rate of 1.3% in Q1, down from 1.6%. Weaker-than-expected economic growth shows the impact of high borrowing costs, which puts pressure on the Fed to start cutting interest rates. This renewed hopes for a Fed rate cut this year, with the likelihood of one in September rising from 51% to 55%. 

Investors are gearing up for this week’s most significant report: the core PCE price index. This index will give a clear picture of underlying inflation in the US and guide traders on whether the Fed will implement rate cuts this year and when. Economists expect the figure to hold steady at 0.3%. Another upbeat inflation report would lead to a rally in USD/JPY that would renew fears of an intervention. 

Elsewhere, data from Japan showed an increase in core consumer inflation in Tokyo. However, figures excluding fuel eased, raising uncertainty about the Bank of Japan’s rate hike cycle. At the same time, there was an unexpected decline in factory output in April, highlighting Japan’s weak economic recovery. A fragile economy complicates the BoJ’s plans to hike interest rates. Therefore, the interest rate differential between the US and Japan could remain wide, weakening the yen.

USD/JPY key events today

• US core PCE price index m/m

USD/JPY technical outlook: Decline pauses at 156.50

On the technical side, the USD/JPY price has broken below the 30-SMA, showing a shift in sentiment from bullish to bearish. However, the decline has paused at the 156.50 support level. Moreover, on a larger scale, the price remains in an uptrend, making higher highs and lows. Consequently, it might bounce off 156.50 to retest the 158.00 level. 

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Even if it breaks below 156.50, the USD/JPY price would meet solid support at the bullish trendline. Only a break below this trendline would signal a reversal in the trend. Otherwise, bulls will likely remain in control.

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