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The ultimate game between Fed's interest rate cut expectations and inflation data
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Hello everyone, today XM Forex will bring you "【XM Group】: The ultimate game between the Federal Reserve's interest rate cut expectations and inflation data." Hope it will be helpful to you! The original content is as follows:
The Fed rate cut expects to be the main driver of the US dollar/yen this month, making Tuesday's U.S. Consumer Price Index report a potential catalyst for breaking through the near-term range.
Feder interest rate pricing remains the main driver
The Fed's expectation of a 2025 interest rate cut has shown an astonishing negative correlation with the US dollar/JPY exchange rate in the past two weeks, with a correlation coefficient of as high as -0.97. When the implicit interest rate cut expectations in the futures market heat up, the US dollar/JPY tends to fall; and vice versa. During the same period, the correlation between the US dollar/JPY and U.S. Treasury yields (both short-term and long-term), and the interest rate spreads between the US and Japan are far less significant. Its correlation with the VIX Panic Index or S&P 500 futures is equally limited, suggesting that the current market is more concerned about changes in the outlook for short-term interest rates in the United States than risk appetite.
If there is no major change in this trend or no unexpected fluctuations occur, the guiding role of US inflation data on the US dollar/JPY trend this week will be more prominent.
The main economic data that affects the trend of the US dollar against the Japanese yen this week. Report on the US Consumer Price Index (CPI), Producer Price Index (PPI), U.S. import and export data, U.S. retail data, Japanese PPI data, Japanese GDP data, etc. For more economic data and risk events that affect the market, see the financial calendar.
In view of the nature of key economic and market events in the United States and Japan that can trigger violent market fluctuations, the US July CPI released on Tuesday is undoubtedly the most critical known risk event in this week's economic calendar. The market expects overall CPI to rise by 0.2% month-on-month, slowing from 0.3% in June. If the previous data is not repairedPositive, the annual rate is expected to rise by 0.1 percentage point to 2.8%. The core CPI (excluding food and energy prices) as a key indicator is expected to rise by 0.3% month-on-month, and if it meets expectations, the annual rate will rise from 2.9% in June to a disturbing 3%.
Although www.xmh100.commodity prices will become the focus of attention due to tariff hikes, inflation signals in the service industry should not be ignored—the indicator often reflects the impact of the overall macroeconomic situation, especially the labor market. The weak inflation performance of the core service sectors that exclude housing and energy services will help alleviate market concerns that the short-term inflation effect brought about by tariffs may solidify. Of course, if the service industry has strong inflation, the situation is exactly the opposite.
In addition to the CPI data, the PPI released on Thursday is equally important. This data not only reflects the upstream price pressure brought by tariffs, but also includes a number of www.xmh100.components of the core PCE price index that directly affects the Fed's preferred inflation indicator - the Fed.
The U.S. import price and retail sales data released on Friday, as well as the Japanese producer price index and GDP data released on Wednesday and Friday, are other important events to pay attention to in the economic calendar.
The public speech schedule of Fed officials seems relatively light, but traders still need to be wary of unplanned www.xmh100.comments that may appear throughout the week, especially after the release of this Tuesday's CPI report. As for the www.xmh100.committee members who have interest rate voting rights this year, Schmid and Goolsbee's remarks need extra attention.
The scheduled meeting between U.S. President Trump and Russian President Putin in Alaska on Friday is another key risk event that could trigger volatility in the U.S. dollar/yen exchange rate later this week. Given that it is unclear whether Ukrainian President Zelensky will participate in the meeting, the outside world is naturally cautious about the expectation of a lasting peace outcome. This also means that if Russia and Ukraine reach an acceptable peace agreement, considering the characteristics of the US dollar/JPY as a financing currency for arbitrage transactions, market risk preferences and the currency pair may face asymmetric risks.
Dollar/JPY technical analysis
The USD/JPY exchange rate remained range-fluctuated last week as the Fed's expectation of a rate cut stabilized - the exchange rate received buying support below 147.00, and encountered selling pressure before the 147.95 resistance level. These two levels constitute the primary focus for traders to pay attention to.
The moderate rebound on Friday led to the "morning star" three-candlestick pattern on the daily chart, suggesting that directional risks may begin to rise. However, since this pattern appears in a narrow range, its technical signal significance has weakened. Momentum indicators such as the Relative Strength Index (RSI14) and MACD also show neutral signals, although they are currently slightly more bullish.
If you break through the 147.95 resistance level, you need to pay attention to the 149.00 and 151.00 levels in the future. If the closing price (not briefly falling intraday) falls below the 147.00 support level, the bears may test the 146.00 or even the 144.40 mark.
Market Outlook
The US dollar/Japanese yen is at a critical turning point, with obvious fluctuations in the range of 147.00-147.95. The Fed's expectation of interest rate cuts (correlation to exchange rate of -0.97) has surpassed traditional factors such as US Treasury yields and has become the core driving force. U.S. inflation faces double pressure: import tariffs push up www.xmh100.commodity prices, while service industry inflation is still affected by the labor market. The meeting between the U.S. and Russia on Friday could bring geopolitical risks.
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