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US Inflation Outcome to Drive Market Direction

USD/JPY & GOLD PRICE OUTLOOK

  • Gold prices and the Japanese yen have performed poorly in recent days after a strong run in the last few weeks of 2023
  • Near-term direction for both assets will likely depend on U.S. inflation data due for release on Thursday
  • This article examines the technical outlook for XAU/USD and USD/JPY, analyzing critical levels to monitor in the coming trading sessions

Gold prices and the Japanese yen had a strong run in late 2023 but have stumbled at the onset of the new year, with traders increasingly reluctant to take additional bullish positions in both assets on concerns that the Federal Reserve’s aggressive easing discounted for the next 12 months will not come to fruition.

While the U.S. central bank pivoted to a more cautious stance at its December meeting and signaled that it would lower borrowing costs in 2024, the market may have gotten ahead of itself by pricing in too many cuts for an economy that continues to display strength and is experiencing above-target inflation.

Should dovish bets on the FOMC’s trajectory start the unwind, U.S. Treasury yields could reaccelerate higher, boosting the U.S. dollar in the process. This scenario could weigh on precious metals and put significant downward pressure on the yen, which lacks support from the Bank of Japan.

To gain insight into the Fed’s next moves and for more clarity on the broader policy outlook, traders should keep an eye on the U.S. economic calendar this week, paying particular attention to the December CPI report, due for release on Thursday morning.

Though core inflation is forecast to have cooled last month, the headline gauge is seen rebounding, ticking up to 3.2% from 3.1% previously, an unwelcomed development for policymakers that is bound to have a negative impact on public opinion and sentiment.

EXPECTATIONS FOR US INFLATION DATA

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Source: DailyFX Economic Calendar

For gold prices and the yen (against the USD) to regain bullish momentum in the near term, the latest U.S. CPI figures need to present compelling evidence of further strides toward price stability. Absent this progress, the Fed could delay the launch of its easing cycle.

In the event of an inflation report surprising on the upside, interest rate expectations are likely to reprice higher rapidly, sending bond yields on a tear. In this scenario, gold and the yen may undergo a more significant downward adjustment in the coming days and weeks (weaker yen means higher USD/JPY).

GOLD PRICE TECHNICAL ANALYSIS

Gold was muted on Tuesday after slipping below a key support region stretching from $2,050 to $2,045 last week. Sustained trading beneath this zone might reinforce bearish pressure, paving the way for a drop toward the 50-day simple moving average near $2,010. On further weakness, the focus shifts to $1,990.

On the other hand, if buyers return and spark an upside reversal, resistance appears at $2,045-$2,050. Taking out this technical barrier could be challenging, but a breakout could set the stage for a rally toward $2,085, the late December peak. Continued strength could propel XAU/USD towards its record.

GOLD PRICE TECHNICAL CHART

A screen shot of a graph Description automatically generated

Gold Price Chart Created Using TradingView

USD/JPY TECHNICAL ANALYSIS

USD/JPY rallied last week, but its climb lost force when prices couldn’t break through resistance at 146.00. For upward impetus to reemerge, we need to see a clean and decisive push above 144.75 and subsequently 146.00. This scenario could give way to a rally towards the 147.00 handle.

On the flip side, if downward pressure gathers impetus, triggering new losses for USD/JPY, initial support is located around the 200-day simple moving average, now at 143.40. Bulls must defend this floor at all costs; failure to do so could lead to a pullback towards last month’s lows.

USD/JPY TECHNICAL CHART

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USD/JPY Chart Created Using TradingView

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