Anticipation Builds for Inflation Data as US Dollar Gains Strength, USD/JPY Finds Itself Enveloped in a Symmetrical Triangle

The U.S. dollar displayed a modest strengthening on Monday, indicated by the rise of the DXY index, thanks to higher U.S. Treasury yields. Towards the end of the afternoon trading session, the greenback gauge recorded a 0.15% increase, reaching 103.75. This marks the second consecutive day of gains as market participants exercised caution ahead of the release of U.S. inflation data.

The U.S. Bureau of Labor Statistics is scheduled to publish the consumer price index survey for May on Tuesday morning.

Analysts anticipate that the annual headline CPI will decline from 4.9% in April to 4.1% in May due to lower energy costs resulting from the correction in oil prices last month. However, the core CPI, which provides insights into longer-term economic trends and is closely monitored by central bank officials, may exhibit less moderation and minimal directional improvement, only cooling down to 5.3% from the previous 5.5%.

If underlying price pressures persistently remain high, it may prompt the Federal Reserve to maintain a hawkish stance this week, even if it ultimately decides to keep interest rates unchanged at its June meeting. For instance, a “pause” in rate hikes could be accompanied by more aggressive dot-plot projections, including a higher terminal rate and no easing until 2024. This scenario would likely bolster the U.S. dollar.

As the week progresses, there will be additional information and data to assess the FX outlook more accurately. However, it seems that conditions are aligning in favor of further U.S. dollar strength and, more significantly, increased volatility in the upcoming sessions. This creates enticing opportunities for traders seeking significant swings in major currency pairs but also entails higher risk, necessitating caution.

USD/JPY Technical Analysis: USD/JPY, the currency pair consisting of the U.S. dollar and the Japanese yen, has been in an uptrend since late March. However, bullish momentum has weakened in recent weeks, and prices have entered a consolidation phase, forming a potential symmetrical triangle pattern.

A symmetrical triangle typically comprises two converging trend lines: an ascending line connecting higher highs and a descending line linking lower lows. Once confirmed, this pattern is generally interpreted as a continuation pattern.

To validate this setup, prices need to break out of the triangle, particularly in the direction of the prevailing trend. In the current scenario, if USD/JPY manages to break above resistance at 140.00, it could gain momentum and aim for levels around 140.70, followed by 142.50, which represents the 61.8% Fibonacci retracement of the selloff between October 2022 and January 2023.

In the event of a setback, initial support lies at 138.80. If sellers successfully breach this level, USD/JPY may revisit 138.00 before potentially testing the 200-day simple moving average.