Insights 
VT 
The USD/JPY remained stable this week due to a lack of new developments, as the market looks ahead to the US CPI data release. Recently, the pair was noted at 147.84 levels, with the US agreeing to amend tariff stacking and reduce auto tariffs following trade negotiations.
The technical outlook shows limited bearish momentum with RSI decline moderating. Support levels are identified at 147.10 and 145.80/146, while resistance is at 147.90 and 149.40/50 levels, as trade allure diminishes due to softer US data and potential rate changes by the Fed and BoJ.
Political Uncertainty And Market Implications
Political uncertainty, involving PM Ishiba’s leadership and credit rating concerns tied to fiscal health, may support the pair. However, the ‘sell USD’ momentum and narrowing yield differentials between UST and JGB could affect this.
We are seeing the USD/JPY pair hold steady around the 147.84 level as the market waits for the US Consumer Price Index data. The release is expected next Wednesday, August 13, with forecasts for core inflation to show a 0.3% month-over-month increase. This report is critical as it will heavily influence the Federal Reserve’s decision on interest rates at their September meeting.
Given the uncertainty around the CPI outcome, we believe that buying options to play on a potential spike in volatility is a sensible approach. A large move in either direction could be profitable for traders holding both call and put options. Looking back, we saw similar volatility spikes around key inflation reports throughout late 2023 and 2024 when the market was sensitive to Fed policy shifts.
If inflation comes in cooler than expected, we could see the ‘sell USD’ trend pick up speed, pushing the pair toward the 147.10 support level. The yield differential between US 10-year Treasuries, currently around 4.10%, and Japanese Government Bonds at 0.95% has been narrowing this year. A soft CPI print would likely accelerate this trend, making the yen more attractive.
Potential Market Reactions To Inflation Data
On the other hand, a surprisingly high inflation number would challenge the narrative of Fed rate cuts and could send the pair testing resistance at 147.90. Domestic political issues, such as PM Ishiba’s recently dipping cabinet approval ratings over fiscal reform debates, could also weigh on the yen. This combination of factors might see the pair aim for the higher 149.40 resistance zone.
The initial excitement from the recent trade negotiation that amended auto tariffs seems to be fading from the market’s focus. Softer US economic data from last month, including a slight miss in retail sales, has shifted attention squarely back to monetary policy. For us, this means the primary driver for USD/JPY in the coming weeks will be the perceived path of the Fed versus the Bank of Japan, not trade headlines.
