USD/JPY refreshes day’s low around 131.40 as street sees further softening of US Inflation

• USD/JPY has refreshed its day’s low at 131.40 as odds for further US inflation softening soar.
• Federal Reserve might look to tweak its monetary policy projections if US inflation continues its downside spree.
• The Bank of Japan is firmly considering an exit from its secular long ultra-loose monetary policy.
• USD/JPY is hovering near the lower portion of the inventory adjustment phase.

USD/JPY has witnessed a steep fall and has refreshed its day’s low at 131.40 as the Bank of Japan (BoJ) is considering an exit from its decade-long ultra-loose monetary policy. The asset is witnessing immense selling pressure in the early European session and is expected to extend its downside journey as the US Dollar index (DXY) is declining gradually toward the crucial support around 102.50.

The USD Index is continuously declining since opening amid an improvement in investors’ risk appetite. Also, S&P500 futures have recovered their marginal loss reported in early Asia and are trading positively, portraying a cheerful market mood. The alpha generated by the US government bonds has dropped as the street is expecting further softening of United States inflation ahead. The 10-year US Treasury yields have dropped to 3.52%.

Lower gasoline prices favor further US inflation softening

Safe-haven assets have lost their traction as investors are expecting further softening of the United States Consumer Price Index (CPI) data, which is scheduled for Thursday. Analysts at Wells Fargo expect another sizable decline in energy prices to weigh on the headline and offset further gains in food and core services prices. But the drop in prices should also be helped along by another decline in core goods, led once again by used autos.

According to the NBF’s consensus, headline prices are decreasing 0.1% MoM and the year-on-year rate should come down from 7.1% to 6.7%. The Core index, meanwhile, may have continued to be supported by rising rent prices and advanced 0.3% on a monthly basis. This would translate into a two-tick decline of the 12-month rate to 5.8%.”

Fed could revise monetary policy projections if inflation softens

Escalating odds for a deceleration in the United States' inflationary pressures are expected to compel the Federal Reserve (Fed) to revise its viewpoint about the likely monetary policy action in its February meeting. Federal Reserve chair Jerome Powell and his teammates might look for trimming the size of interest rates further if inflation continues its deceleration spree and also to provide support to the slowing economic activities in the United States economy.

San Francisco Fed President Mary Daly told the Wall Street Journal (WSJ) she would pay close attention to the Consumer Price Index (CPI) data and that both options of 25- and 50-basis points (bps) hikes are open for February monetary policy meeting. A consideration of a 25 bps rate hike for the February meeting when the Federal Reserve has already trimmed its pace of hiking interest rates in December is conveying that Fed policymakers are delighted with the pressure of indicators showing a deceleration in inflationary pressures.

Chatters over exit from the loose monetary policy by the BoJ escalates

Odds for an exit from the decade-long ultra-loose monetary policy by the Bank of Japan accelerate after the announcement that the central bank will review the side effects of massive monetary policy easing at its policy meeting next week, as reported by Yomiuri. “BoJ reviews due to skewed interest rates in markets even after last month's tweak in a bond yield control policy,” adds Yomiuri per Reuters.

After a tweak in 10-year Japan Government Bonds (JGBs)’s yields by stretching its range to +- 50 basis points (bps), consideration of exit from ultra-loose monetary policy is sending hawkish signals from the Bank of Japan. Recent development in wage growth and retail demand has already pushed Japanese inflation comfortably above its 2% target.

USD/JPY technical outlook

USD/JPY is hovering around the lower portion of the inventory adjustment phase formed on an hourly scale. The formation of inventory adjustment after a vertical downside move terms inventory distribution, which might result in further weakness in the asset.

The major is hovering below the 200-period Exponential Moving Average (EMA) at 132.32, which indicates that the long-term trend is bearish. Also, the bear cross, represented by the 20 and 50-EMAs at 132.24, adds to the downside filters.

Also, the Relative Strength Index (RSI) (14) has shifted into the bearish range of 20.00-40.00, which indicates that the downside momentum has been triggered.