USD/JPY falls to one-year low on drops in stocks, US CPI

<p>USD/JPY dropped sharply on Wednesday morning as global stock markets from Asia to Europe to the US took yet another beating and the US Consumer […]</p>

USD/JPY dropped sharply on Wednesday morning as global stock markets from Asia to Europe to the US took yet another beating and the US Consumer Price Index (CPI) for December showed that prices fell unexpectedly.

Wednesday’s early drop in global equities follows more than two weeks of sharp losses and heightened volatility that were initially sparked by market turmoil and economic growth worries in China at the very beginning of the year. This prompted a rebound for the Japanese yen, which had lately been losing some traction due to stocks consolidating losses and showing slightly more stability earlier in the week. The yen rebound on Wednesday was spurred largely by a return of equity market volatility that helped to direct asset flows back towards the perceived safety of the yen in an increasingly “risk-off” financial market environment.

At the same time, the CPI and Core CPI inflation readings were released from the US on Wednesday morning. The data showed that prices unexpectedly fell in December by 0.1% against prior consensus expectations of an unchanged CPI. This drop was largely due to exceptionally weak energy prices. Excluding volatile energy and food prices, however, the Core CPI also showed a lower-than-expected gain of only 0.1% against prior expectations of 0.2%. These weak inflation numbers may pose a significant obstacle to achieving the Fed’s inflation target and perpetuating a monetary tightening cycle in the US.

The combination of the Japanese yen being propped up by heightened stock market volatility, along with the US dollar potentially being at risk due to increasing concerns over the viability and pace of Fed tightening, has led to another dive for USD/JPY. The currency pair dropped down to touch the key 116.00 support level on Wednesday, hitting a new one-year low. This occurs after price was unable to break significantly above the 118.00 resistance level for the past week and a half.

With global market volatility not likely over just yet, USD/JPY could have yet further to fall. On any sustained breakdown below the 116.00 support level, the next major target is at the 114.00 support level. From somewhat of a longer-term perspective, a continuation of the recent downtrend for USD/JPY could see the currency pair begin to target major support around the 110.00 level.

USD/JPY Daily Chart

 

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