Currency traders are usually attentive to inflation data because strong inflation tends to lead hawkish monetary policy, which in turn should strengthen the home currency. And with the speed information and analysis in today's markets, this chain of event is immediately priced in. On Wednesday (2/15), we saw stronger-than-expected US inflation data for January.According to Reuters, the 4-year high in month to month inflation was buoyed by strong retail sales. Both inflation and retail sales data beat forecasts.Month to Month Inflation:January CPI: 0.6%, Forecast: 0.3%, December: 0.3%Core CPI: 0.3%, Forecast: 0.2%, December: 0.2%Month to Month Retail Sales:January Retail Sales: 0.4%, Forecast: 0.1%, December: 1.0% (Revised up from 0.6%) Core Retail Sales: 0.8%, Forecast: 0.4%, December: 0.4% (Revised up from 0.2%)Also, the Empire State Manufacturing Index for February came in at 18.7, which beat forecasts of 7.2. The January Index came in at 6.5. This is a measure of manufacturing activity in the New York. A reading above 0 reflects growth. USD/JPY 4H Chart 2/16(click to enlarge)Reaction:- Take a look at the 4H chart. We can see that USD/JPY has been rallying ahead of the 2/15 release of inflation, retail sales, and manufacturing data.- However, even though all the data beat forecast, we can see that USD/JPY retreated.- From this reaction, I would say that the market is bullish on USD/JPY because Yellen spoke against holding rates for too long. - However, the market also remembers a similar tone at the beginning of 2016. We only got 1 rate hike, when 2 to 3 were projected. - So, today's sell off was a classic buy the rumor sell the news - the rumor meaning the anticipation of good data, and the news being the release of good data.Looking Forward:- Basically, today's reaction simply means the market is cautious.- I still think the market will remain bullish as long as price can hold above 114.- A close below 114 this week would reflect a sideways to possibly bearish market. - The 113.25 pivot might be the last line of defense for a bullish outlook.- A hold above 114 would add confidence to the bullish outlook, which started to develop last week.Previous USD/JPY update: USD/JPY Signals Bullish Continuation after PPI Report and Yellen