The USD/JPY exchange rate continued its strong uptrend this week after the US published strong January inflation numbers. The pair surged to a high of 151, its highest point since November as focus shifts to the upcoming Japan GDP numbers. 

The USD/JPY pair surged hard as the US dollar index (DXY) continued its remarkable comeback. As I wrote in this article, the index was ripe for a bullish breakout because it had formed an inverse head and shoulders pattern. In most cases, this is one of the most popular bullish signs in the market.

This rally happened after the US released strong inflation numbers. According to the BLS, the headline CPI rose by 3.1% in January, higher than the median estimate of 2.9%. Core inflation remained at 3.9%, double the Fed’s target of 2.0%. The implication is that the Federal Reserve will likely not move to cut interest rates as the market expects. In an email statement, Arnim Holzer of Easterly Risk Solutions said:

Looking forward, the next important USD/JPY news will come out on Thursday when Japan publishes the latest GDP numbers. Economists polled by Reuters expect the data to show that the economy expanded by 0.2% in the fourth quarter after contracting by 0.7% in Q3. 

This growth will be driven by a 0.3% increase in consumer spending and external demand. The report will come at a time when many analysts expect that the Bank of Japan (BoJ) will deliver its first interest rate hike in over a decade this year. Besides, inflation and wage growth have been sticky in the past few months.

USD/JPY chart by TradingView

The daily chart shows that the USD to JPY pair has continued to make higher highs and higher lows after bottoming at 140.25 in January. It flipped the important resistance point at 148.77 (January 19 high) into a support level this week.

The pair has remained above the 50-day and 25-day moving averages while the Average Directional Index (ADX) remains above 20. This is a sign that the pair has a bullish momentum. Therefore, the outlook is bullish, with the next reference level to watch being 151.87, the highest point on November 13th.

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