The markets haven’t shown much of a response to this morning’s release of the US consumer price index, despite the fact that the headline reading contracted for the first time since 1955 on an annualized basis.
Indeed, CPI fell 0.1 percent in March, dragging the annualized rate down to -0.4 percent, as energy prices fell by 3 percent. However, excluding food and energy, core CPI actually rose 0.2 percent and the annualized rate held steady at 1.8 percent. All told, this should be somewhat comforting to the Federal Reserve, as the minutes from the Federal Open Market Committee’s (FOMC) last meeting showed that “a few” members were concerned about deflation risks. Ultimately, we will need to see the core CPI results reflect similar declines to the headline readings before it can be said that the US is in the midst of deflation.
That said, there is still the risk looming that it a protracted period of contracting prices will occur in late 2009 or 2010. The truth of the matter is that demand, especially for discretionary goods, is likely to fall much further as the unemployment rate climbs. In fact, the unemployment rate hit a more than 25-year high of 8.5 percent in March, and with initial and continuing jobless claims showing no signs of abating, the rate could ultimately breach the upper range of the FOMC’s projections of 9.2 percent, and perhaps reach double-digits.
Looking to USD/JPY, the pair moved higher for a test of falling trendline resistance at 99.50 following the release.
Source: FXTrek Intellicharts
On a longer term basis, though, the latest FXCM SSI figures show that traders remain net long USD/JPY, and as a contrarian indicator, suggests scope for further declines. While there is key support looming below at the 200 SMA at 98.92, a daily close below that point warrants a bearish bias. Potential targets include the confluence of rising trendline support and the 50 SMA at 96.75, and the 50% fib of 87.15-101.47 at 94.30.
Source: FXTrek Intellicharts
Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com
