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  • USD/JPY is consolidating above the 104.50 mark after posting a big drop on Tuesday.
  • Looking ahead, US CPI and comments from Fed Chair Powell will be in focus on Wednesday.

USD/JPY is consolidating in the 104.50s, having dropped from above the 105.00 level prior to the start of the Tuesday Asia Pacific session. The pair closed Tuesday trade with losses of 0.6% or 66 pips.

JPY was one of the outperforming G10 currencies on Tuesday, despite risk appetite broadly holding up (stocks were mixed but commodities were mostly higher). The US dollar was hit on Tuesday, with the “short-squeeze” of recent weeks that took the Dollar Index (DXY) as high as the 91.60s apparently over. The Dollar Index fell below 90.50 on Tuesday and for whatever reason, JPY was the largest beneficiary.

Referring to price action last week, when JPY was an underperformer, CitiFX comment that “recent JPY weakness has been driven by real money reducing exposure; however they remain long… this reduction has been offset partially by inflows from hedge funds as well as retail investors who reached a close to 2-year high in CFPI”. Perhaps then hedge funds and retail investor inflows are the explanatory factor behind Tuesday’s gains.

Coming up this week

Looking ahead, USD/JPY is most likely to continue to take its cue from the US dollar side of the equation amid a lack of any further pertinent scheduled Japanese economic events for the rest of the week. Focus will thus be on US Consumer Price Inflation data set to be released at 13:30GMT on Wednesday and then on comments from Fed Chair Jerome Powell, who is speaking at 19:00GMT.

Amid expectations that 1) the US Congress will deliver another hefty fiscal stimulus package, that 2) rapid vaccination rollouts will allow major developed markets to reopen economically over the Norther-Hemisphere’s summer months and 3) that global central banks (such as the Fed and ECB) will continue their highly accommodative monetary policy stances in place for the foreseeable future, markets have been betting that higher inflation is incoming (hence why 10-year inflation break-evens recently broke out to six-year highs above 2.20%).

Wednesday’s US inflation data will thus be closely watched for any evidence that this expected surge in inflation is arriving sooner than expected. If the inflation data is stronger than expected, Powell is likely to play this down and impress on markets that the Fed will be looking through any transitory jumps in inflation, as the bank is looking to boost inflation above 2% on a more sustainable basis. Note that most analysts expect inflation in the US to rise above the Fed’s 2% YoY growth target in the coming months (perhaps even as high as 3%), though this is mostly as a result of base effects rather than a high rate of price growth in 2021 (i.e. prices dropping last year during the first lockdown and making the YoY rate of inflation look higher than it really is).