USD/JPY Forecast: Looks to US CPI for convincing break through one-week-old range

• A combination of factors assists USD/JPY to attract some dip-buying near the 146.00 mark.
• A positive risk tone undermines the JPY and acts as a tailwind amid a modest USD rebound.
• The upside remains capped as traders keenly await the release of the crucial US CPI report.

The USD/JPY pair reverses an intraday dip to the 146.00 mark, or a fresh weekly low touched earlier this Wednesday and builds on its steady intraday ascent through the early European session. Spot prices, however, remain confined in a familiar range held over the past week or so as traders await more cues about the Federal Reserve's (Fed) rate-cut path before positioning for a firm near-term direction. Hence, the market focus will remain glued to the release of the closely-watched US Consumer Price Index (CPI) report, due later today, which is expected to infuse some volatility in the markets and provide some meaningful impetus to the currency pair. 

The headline CPI is expected to rise 0.2% MoM in July and at an annual rate of 2.9% in July, down slightly from the 3% in the previous month. Meanwhile, the core CPI, which excludes volatile food and energy prices, is seen ticking lower to 3.2% from 3.3% in June. Against the backdrop of last Friday's disappointing US jobs report, a softer-than-expected US CPI print will lift bets for a 50 basis points (bps) interest rate cut at the September FOMC policy meeting. This might prompt fresh selling around the USD, which dropped to over a one-week low on Wednesday in reaction to a weaker US Producer Price Index (PPI) report, and drag the USD/JPY pair lower. 

Ahead of the high-impact macro data, some repositioning trade assists the USD Index (DXY), which tracks the Greenback against a basket of currencies, to regain some positive traction and reverse a part of the previous day's losses. Furthermore, a generally positive tone around the equity markets, along with diminishing odds of the Bank of Japan (BoJ) hiking interest rates again this year, undermines the safe-haven Japanese Yen (JPY) and lends support to the USD/JPY pair. BoJ Deputy Governor Shinichi Uchida said last week that the central bank won't hike rates when markets are unstable. Apart from this, geopolitical risks should limit losses for the JPY. 

Meanwhile, investors remain worried about the risk of a further escalation of geopolitical tensions in the Middle East. This could keep a lid on any optimism in the market and further contribute to limiting the downside for the JPY. Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the USD/JPY pair's recent goodish recovery from the 141.70-14.65 area, or the lowest level since early January touched last week. 

Technical Outlook

From a technical perspective, the USD/JPY pair seems to have found acceptance above the 23.6% Fibonacci retracement level of the recent steep decline from a multi-decade high. This, along with the emergence of some dip-buying on Wednesday, supports prospects for some near-term appreciating move. That said, it will be prudent to wait for a breakout through a short-term trading range resistance, around the 147.80 area, before placing fresh bullish bets. Spot prices might then accelerate move beyond the 148.00 mark and the weekly swing high, around the 148.20 region, towards reclaiming the 149.00 mark. The momentum could extend further towards the 38.2% Fibo. level, around the 149.30 zone.

Meanwhile, oscillators on the daily chart are holding deep in negative territory and also seem to have recovered from the oversold zone. This, in turn, suggests that any meaningful recovery attempt is more likely to attract fresh sellers and remain capped. In the meantime, the Asian session low, around the 146.00 mark, now seems to protect the immediate downside ahead of the 145.50-145.45 region. Some follow-through selling has the potential to drag the USD/JPY pair below the 145.00 psychological mark, towards testing the next relevant support near the 144.20-144.15 horizontal zone. The latter should act as a key pivotal point, which if broken decisively will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.