The Japanese Yen rose to fresh one month highs during the weekly reopening, even after a stronger fundamental reading on inflation failed to dislodge the currency’s recent strength. The latest trend in the Yen highlights that despite positive news that would normally cause a negative reaction, the Yen’s strength remains intact. Now that producer price declines are starting to fade, it is possible that consumer price inflation will also mount a recovery over the coming months, helping headline inflation rise towards the 2.00% target.

However, while the advance in inflation should generally be viewed as a negative development for the Yen, the currency continues to appreciate against the dollar as the USD/JPY pair pulls back from near a 1-year high. With the US dollar still facing pressure after a steep drop from the open of 2017, the holiday session may also see any reversal stall out as investors remain on the sidelines. Nevertheless, upcoming inflation figures due later this week from the US may see the dollar’s stage a comeback after the most recent correction.

Producer Price Gains Overshadowed by Machinery Orders

Key metrics released overnight by Japan indicated that any recovery optimism should be tempered. While inflation data proved positive, headline producer price deflation slowed to -1.20%, marking the best print in over a year after 21-straight months of negative readings. This is a hallmark of the progress being made to restore inflation and reach the Bank of Japan’s 2.00% target. Helping matters is the positive tailwind pushing energy prices and the weaker Yen, which has contributed to higher export prices. With consumer price inflation growing at a 0.50% annualized pace as of November, the fading losses in producer prices may translate to further upside pressure for CPI rates over the medium-term.

The more negative development overnight came in the form of machinery orders which slipped by -5.10% during the month of November. The annualized core figure managed to rise by 10.40%, underscoring the gradual improvements over time, but concerns still linger about how lopsided momentum in the Yen may impact the broader economy over time. While higher inflation would generally be viewed as Yen positive by bringing about the possibility of the Central Bank moving off the zero bound, the added element of risk aversion is also contributing to upside pressure in the currency. Upcoming data could conceivably change the USDJPY trajectory. However, if global dynamics continue to weaken, driving demand for haven assets, traders may instead opt to unwind carry trades, which would add to the forcefulness of the recent Yen appreciation.

Mixed Fundamentals Fail to Spark USD/JPY Turnaround

After reaching the highest point since January of 2016 back in December, the USD/JPY price action of late suggests a technical correction is underway following the sharp movement higher in the wake of the US election results.  Looking at the move in the context of the November lows through the December highs, the Fibonacci retracement measurement implies that a pullback as deep as the 61.8 Fibonacci level or 107.900 is feasible while keeping the most recent uptrend intact.  Any dip below this level would imply a potential reversal lower. Corroborating this viewpoint were momentum indicators such as the Relative Strength Index and Stochastic Oscillator, trending above the overbought threshold at the same time highs were reached.

At present, the retreat in USD/JPY has reached its first major test: the 50-day moving average. The level is acting as support with the 200-day moving average right below the 61.8 Fibonacci level also providing additional support. However, the bullish moving averages crossover that occurred back in December suggests that any additional retreat may be short-lived. Furthermore, with the Stochastic Oscillator now trending once more in oversold territory, the time could be ripe for a rebound in the USD/JPY pair back towards the 120.00 level. However, any sustained momentum lower will target support at 113.317 and 111.332.

What Binary Options Traders Should Watch For

There are numerous factors both internal and external that could impact the dynamic of USD/JPY price action over the coming sessions. The major development that could very well reverse the most recent decline in the pair is upcoming inflation data from the United States. Further gains in US headline CPI could pave the way for a quicker pace of interest rate hikes over the coming months, fueling upside in the US dollar. However, any disappointment could accelerate the downside losses in USD/JPY. Apart from US data, not much in the way of important announcements are set to be made from Japan this week aside from industrial production figures due on Tuesday.

The final development that could impact USD/JPY price momentum is the external picture for the global economy. More concerns about the impact of worsening Chinese trade, the upcoming Brexit details, or even geopolitical developments should not be ignored. With US President-elect Donald Trump and Federal Reserve Chair Janet Yellen also scheduled to speak this week, there is the potential for significant USD/JPY volatility around the time of the remarks. However, overall, the most recent move in USD/JPY resembles a correction, and less a reversal, suggesting new potential bullish entry points for the latest run lower this coming session.