US Producer Prices to Spotlight the Fed

While market bets on a BoJ rate hike linger, US inflation data will influence sentiment toward the Fed rate path. Economists forecast producer prices will rise 2.6% year-on-year in January, down from 3.0% in December. Furthermore, economists expect core producer prices to increase 3.0% YoY in January, down from 3.3% in December.

Weaker producer prices would suggest a softer inflation outlook, supporting a June Fed rate cut. Rising bets on a June cut would weaken the US dollar and affirm the bearish outlook for USD/JPY.

Recent US economic indicators have tempered bets on a June rate cut, sending USD/JPY to 156. However, weaker-than-expected producer prices would likely trigger a US dollar sell-off on rising expectations of a Fed policy adjustment.

According to the CME FedWatch Tool, the probability of a June cut fell from 58.6% on February 19 to 47.8% on February 26.

Technical Outlook: Key Levels to Watch

For USD/JPY price trends, traders should consider technical indicators, key economic indicators, government policies, and central bank rhetoric.

On the daily chart, USD/JPY remains above its 50-day and 200-day Exponential Moving Averages (EMAs). The EMA positions signal a bullish bias. However, favorable yen fundamentals counter the bullish technical outlook, supporting a bearish medium-term outlook.

A drop below the 50-day EMA would expose 153. If breached, the 200-day EMA would be the next key technical support level. A sustained fall through the 200-day EMA would open the door to testing the 150 support level.

Significantly, a sustained fall through the EMAs would indicate a bearish trend reversal and reaffirm the negative medium- to longer-term price outlook.