According to US government data released yesterday, the so-called core consumer price index (CPI), which excludes food and energy costs, rose 0.4% from February. It increased 3.8% compared to a year ago, remaining stable from the previous month.
US core inflation readings exceeded forecasts for the third month in a row, foreshadowing a new wave of price pressures that will likely delay any interest rate cuts by the Federal Reserve (Fed) until the end of the year.
Economists believe the core index gives a better representation of core inflation than the overall consumer price index. According to the Bureau of Labor Statistics, it was up 0.4% from the previous month and 3.5% from a year ago.
Housing prices, the largest service category, rose 0.4% for a second month. The equivalent owner's rent — the part of housing that is the largest component of the CPI — rose similarly.
Bloomberg Economics points out that there is a stronger signal from the report that deflation is slowing. Analysts are postponing their expectations of the first rate cut to July from their first forecast for June.
The Fed is also hesitant to cut interest rates in light of the robust labor market, especially after last week's employment report showed strong hiring and the unemployment rate fell.
The USDJPY strengthening driven by yesterday's CPI report is likely to face strong counter resistance from the Japanese authorities.
Bank of Japan Governor Kazuo Ueda has previously said he would consider a monetary policy response if yen weakness causes a surge in inflation. In addition, the Japanese Ministry of Finance has repeatedly warned the markets about interventions that will follow in case of USDJPY strengthening.
From a technical point of view, USDJPY also has a bearish divergence between the price and the RSI indicator, which signals a potential downward movement of the pair.
The overall recommendation is to sell USDJPY.
Profits should be taken at the level of 152.0. A Stop-Loss could be set at the level of 153.4.
The possible loss should not exceed 2% of your deposit funds.
This content is for informational purposes only and is not intended to be investing advice.
