USD/JPY: a cheap buy in at key 109.30 support, CPI not all that bad

• USD/JPY: bears take control on the CPI miss and test the key support area on 109 handle.
• USD/JPY: the key territories on the 10 handle remain compelling on Fed prospects in 2018.

USD/JPY has plummeted back to test the key break out area of 109.30/40, a prior Tenkan line that held the bulls off on a number of previous bullish attempts before finally breaking up to test the 110 handle where the 200-D SMA and various fibos were attracting hungry bears. The culprit? - US CPI. Currently, USD/JPY is trading at 109.48, down -0.25% on the day, having posted a daily high at 110.03 and low at 109.32.

US CPI, not all that bad

US CPI arrived at +2.5% vs +2.5% y/y expected, beating the prior 2.4%. But ex food and energy +2.1% y/y vs +2.2% y/y expected vs +2.1% y/y prior. For the month, CPI arrived at 0.2% vs 0.3% expected.  The numbers are decelerating and the three-month annualized core CPI reading is below 2%. The DXY dropped to a low of 92.54 from a 93.16 high and USD/JPY fell from 109.72 to 109.31 the low (previous hard resistance). 

However, headline inflation has only been higher once in the past six years. Both core and the headline are above the Fed's 2% target and out of all the main inflation measures, only the core PCE deflator is below 2% right now (1.9%), and analysts at ING argued that it is almost certain to imminently break above 2%YoY:

"We see further upward price pressures developing and predict CPI approaching 3%YoY and core CPI rising to 2.5% by summer...As such, we think the market consensus forecast for CPI this year is too low and that in an environment of robust economic activity fuelled by tax cuts and a tight jobs market there is the risk of a market re-appraisal. We look for three further interest rate rises from the Fed this year, running at one every quarter, with US 10Y Treasury yields moving up to a 3.25-3.50% range in 2H18."

USD/JPY levels

Should the market follow such a consensus, the divergence between the Fed and BoJ come back into play and the familiar targets on the 11o handle are compelling. The 61.8% of the Nov-Mar drop & Nov low at 110.85 comes after a break of the 200-D SMA at 110.18.  Above the 200 day ma, a test of the 112.39 2015-2018 downtrend line is open.Below the 109.30 support, attention will be towards a break below the 108.50 level. This will open risk towards the 50-D SMA before the 2018 low at 104.63 as a key support.