The USD/JPY exchange rate continued its remarkable comeback ahead of the crucial US inflation and Japan GDP numbers. It has risen for three straight days and is hovering near its highest swing since May 1st. 

The USD to JPY exchange rate will be in the spotlight this week as investors focus on the upcoming US inflation data set for Wednesday.

Economists polled by Reuters believe that inflation remained stubbornly high in April as energy, housing, insurance, and medical costs jumped.

The median estimate is that the headline CPI slowed to 3.4% in April from the previous 3.5% while the core CPI slowed to 3.6% from 3.8%. 

If these numbers are accurate, it will mean that inflation remained stubbornly higher than the 2% Federal Reserve target.

It will also mean that the US is stuck in a stagflation, which is characterised by high inflation and slow economic growth. The most recent data revealed that the economy expanded by just 1.6% in the first quarter, lower than Q4’s growth of 3.4%.

Recent numbers have also shown that consumer confidence crashed to its lowest level since 2022 as concerns about inflation continued. Manufacturing and services PMIs dropped to the contraction zone in April.

Therefore, if inflation numbers come out stronger than estimates, it means that the Fed will opt to leave rates higher for longer. On the other hand, if inflation slows, the Fed will likely start to cut rates in he third quarter.

The USD/JPY exchange rate will also react to the upcoming Japanese GDP numbers that are set for Thursday. Economists polled by Reuters expect the report to reveal that the economy contracted by 0.4% MoM and 1.5% YoY in Q1.

These numbers will likely put more pressure on the Bank of japan (BoJ) as it battles with a weak yen. Hiking rates will slow the economy further.

USD/JPY chart by TradingView

The daily chart shows that the USD/JPY exchange rate has been in a strong bullish trend, signaling that Japan’s currency interventions are not working. It has jumped above the key support level at 151.88, its highest swing in 2023, meaning that it has formed a break and retest pattern.

The pair has also jumped above the 50-day Exponential Moving Average (EMA) while the Relative Strength Index (RSI) has moved slightly above the neutral level. Also, the Average Directional Index (ADX) has pointed upwards, signaling that the pair has a bullish momentum.

Therefore, the outlook remains bullish, with the next target being at 160.25, its highest swing on April 29th. 

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