US CPI Preview: USD/JPY Tests 2024 Highs, Tame Inflation Expected

US CPI Key Points

US CPI is expected to fall to 2.9% y/y, with the “Core” (ex-food and -energy) reading coming in at 3.8% y/y.
The recent surge in the “Prices” component of the ISM PMI surveys hints that inflation could reaccelerate this Spring.
USD/JPY is testing key resistance at 149.40 ahead of the report – a hot reading could lead to another leg higher in the pair.

When is the US CPI Report?

The January US CPI report will be released at 8:30am ET on Tuesday, February 13, 2024.

What Are the US CPI Report Expectations?

Traders and economists expect the US CPI report fall to 2.9% y/y on a headline basis, with the “Core” (ex-food and -energy) reading anticipated at 3.8% y/y.

If these expectations are realized, it would mark the lowest year-over-year readings for the two measures in nearly three years.

US CPI Forecast

Heading into the year, there was a clear “script” that traders and economists were expecting the US economy to follow:

Job growth would continue to slow and…
…Inflation would gradually recede back to the Federal Reserve’s 2% target, prompting…
…The central bank to cut interest rates repeatedly, starting in March.

There’s been just one problem with this: The economy didn’t get the memo. Instead of following that script, we’ve seen blowout employment figures, inflation seemingly reaccelerating, and the Fed pushing back on expectations for interest rate cuts in March. Tomorrow’s US CPI report is the next big test to see if the nascent trend of US economic exceptionalism in 2024 continues.

Digging into the data, headline CPI has clearly seen its decline stall over the last couple of quarters, with the year-over-year measure actually increasing from 3.0% to 3.4% over the last six months. That said, the Fed is more concerned with the “Core” CPI reading, which is seen as more indicative of underlying price pressures and has continued to edge lower in recent months.

One of the best leading indicators for inflation is the “Prices” component of the Manufacturing and Non-Manufacturing PMI surveys. Historically, a simple average of these two components has been a relatively reliable predictor of CPI readings 3-6 months into the future, as the chart below shows:

Source: TradingView, StoneX

While it won’t necessarily impact CPI dramatically this month, the most recent round of PMI surveys showed prices increasing for 58.5% of respondents across the two surveys, suggesting that inflation could well tick up as we move into the Spring. This is no doubt a concern for the Fed and may lead to a smaller-than-expected reaction even if this week’s (lagging) CPI reading comes in below expectations.

Notably, traders are not necessarily expecting a massive move on the back of this month’s CPI report. Measures of implied volatility in the FX market are hovering near 2-year lows amidst the ongoing Lunar New Year holiday, and according to Reuters, options traders are pricing in an average of a 38-pip move in EUR/USD and 58-pip move in USD/JPY ahead of the data. That said, with fewer traders at their desks than usual, there’s certainly the potential for an outsized move if the data truly surprises relative to expectations.

Japanese Yen Technical Analysis – USD/JPY Daily Chart

Source: TradingView, StoneX

As is often the case with US data, USD/JPY may have the “cleanest,” most logical reaction to this month’s CPI data. Looking at the chart above, USD/JPY is consolidating after its breakout above 148.70 resistance last week.

For this week, the key resistance level to watch will be the 78.6% Fibonacci retracement of the November-December drop near 149.40. If bulls are able to overcome that resistance level (potentially on the back of a hotter-than-expected US CPI report), the pair has little in the way of technical resistance until closer to 152.00. Meanwhile, a soft inflation reading and bearish reaction in USD/JPY could take rates below previous-resistance-turned-support at 148.70, opening the door for a deeper retracement below 148.00.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.