US dollar exchange rates regained some ground on Tuesday after US core CPI inflation came in higher than expected at 0.5% on a monthly basis. This indicated what the Federal Reserve still needs to do to bring down inflation, even if the financial system shows up with signs of stress lately.
Accordingly, the USD/JPY currency pair recovered to the 134.90 resistance level, after it collapsed to the 132.28 support level, amid market concerns about the collapse of US banks.
The currency pair settled around the 134.50 level at the time of writing the analysis, awaiting any news and reactions from the rest of the US economy announcements .
- The core US inflation reading was more than the consensus forecast of 0.4% but in the year to February, it eased from 5.6% to 5.5%.
- Meanwhile, the headline CPI inflation reading eased from 6.4% in January to 6.0% in February, which was expected.
- Shelter was by far the largest component of the rise in inflation, which indicates an easing of the breadth of price pressures.
The data may prompt the Federal Reserve to pause its rate hike cycle in March as it temporarily sets aside its inflation targeting mandate to counter signs of stress in the financial system. The recent failure of a number of US banks has prompted the market to cut bets on future rate hikes, with some investment banks now anticipating a cut.
In general, the US dollar fell sharply in the wake of the failure of the Silicon Valley Bank (SVB) and the market's rapid move to cut interest rate hikes. But the US dollar may find some relief if signs of financial stress start to abate as this would suggest to the Fed that its targeted measures to contain the SVB fallout are working and thus monetary policy would not be required to act as an additional lever.
The dollar fell against all of the other major currencies in the one-week time frame as the US Federal Reserve is now expected to be the only central bank among its peers to engage in interest rate cuts in 2023, according to money market pricing. However, downside risks to the currency may fade if the Fed sees through the recent turmoil and reiterates its commitment to keeping inflation under control.
Wells Fargo joins peers at Goldman Sachs and Barclays in leaning toward a "pause" in the March meeting so that policymakers can digest the important developments of the past week.
Forecasts of the US dollar against the yen:
According to the performance on the daily chart below, the price of the USD/JPY currency pair is still in the stage of breaking the general bullish trend. The direction may turn bearish if the currency pair moves towards the support levels 131.80 and 130.00, respectively. The bulls will regain control of the trend if the currency pair returns around and above the resistance level 135.50. In general, I still prefer to buy the dollar / yen from every downward level today. The currency pair will be affected by the announcement of the US retail sales numbers and the reading of the producer price index.
This is in addition to any developments on the ground for the US banking system.
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