A weak inflation report is not expected to derail the dollar’s bullish trend

The USDJPY pair has been treading water around the 135.00 figure since the start of the week, struggling for direction after a strong bounce from early-June lows seen around 130.40 where the ascending 100-DMA capped the downside. The dollar is now stuck between the 100- and 20-DMAs, clinging to the upper end of the trading range.

The pair stays resilient despite a lackluster performance by the USD index, suggesting the yen bulls stay on the back foot amid the prolonged monetary policy easing by the Bank of Japan, while the Fed continues to deliver hawkish hikes amid the elevated inflation. Rate hike bets rose significantly after an unexpectedly strong US jobs report last Friday.

Of note, the current subdued trading in currency markets is due to a cautious tone by traders ahead of the US inflation report due on Wednesday. The data could bring renewed volatility through the dollar’s reaction. The CPI is expected to have slowed to 8.7% от July from 9.1% previously. If so, the greenback could retreat across the market in the near term. However, for a more sustained bearish pressure and a neutral stance by the Fed, a series of the declining inflation rate is needed. In other words, a weak inflation report is not expected to derail the dollar’s bullish trend.

In the near term, USDJPY is likely to further oscillate around 135.00 before deciding on the further direction. The pair could revisit the mentioned 100-DMA, today at 131.00, in the coming days, but a deeper and more prolonged retreat is unlikely at this stage. On the upside, a decisive break above the 20-DMA, today at 135.85, would bring long-term highs above 139.00 back into the market focus.


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