USD/JPY fell to the support level of 134.11, after new data showed that inflation continued to slow in the world's largest economy. It raised expectations that the Federal Reserve has ended the cycle of raising interest rates. Prior to the announcement of the US inflation figures, the currency pair was stable around the resistance level of 135.47. According to the official announcement, the US headline consumer price index rose 4.9% on an annual basis, down from 5.0% in March and less than expectations of 5.0%. The monthly increase stood at 0.4%, in line with expectations but up from March's gain of 0.1%. The all-important core CPI inflation figure came in at 0.4% mom in April, in line with expectations and unchanged in March, bringing the annual reading to 5.5%.
According to the trading also, the GBP/USD rose by 4.6% in 2023 amid expectations that lower inflation in the United States will temporarily stop the Fed's tightening while also raising speculation that interest rate cuts will be implemented before the end of the year. The data supports the trend of dollar weakness, which may allow the pound sterling - the main currency, the best performer in 2023 - to extend its upward trend.
The Federal Reserve raised US interest rates by 25 basis points again last week, but the guidance ratified market expectations of a pause in upcoming meetings. With inflation trending downward, these expectations will be further reinforced. Commenting on this, Karen Charbonneau, an economist at CIBC Capital Markets, says: “Today's data was in line with expectations and does not change our view that the Federal Reserve has paused interest rate hikes.”
The focus of the forex market is now declining on the scope of the Fed's upcoming rate cuts, with markets pricing in as many as 66 basis points of rate cuts by the end of the year. The US Federal Reserve will have to endorse these projections at upcoming meetings for the dollar's downside to extend, but this will require inflation to turn lower in a more convincing way.
CIBC Capital Markets warns that the market is wrong to expect a US rate cut in 2023.
According to some analysts, the US Federal Reserve has a stubborn inflation problem that must be fought and that a rapid decline in inflation towards its target is not yet in sight. However, it appears concerned that it could raise interest rates too far and then risk a hard crash for the economy. The US economy is slowing with 500 basis points of Fed rate hikes affecting businesses, consumers and - most recently - the banking sector. Further raising interest rates could deepen the problems of mid-level US banks and create a serious financial crisis that would lead to a deep economic downturn.
Dollar expectations against the Japanese yen today:
- According to the performance on the daily chart below, the price of the USD/JPY currency pair is still moving in a neutral position.
- The tendency will be stronger to the upside if the currency pair moves towards the resistance levels 135.50, 136.20, and 137.00 again.
- On the other hand, the move towards the support level 133.30 will be important to change the trend to bearish.
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