HomeNewsUSD/JPY Firms as CPI Fireworks Fizzle
USD/JPY Firms as CPI Fireworks Fizzle

USD/JPY Firms as CPI Fireworks Fizzle

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USD/JPY is on track to finish the week with a second day of gains, as Federal Reserve speakers talk down the odds of a dovish pivot.

The US dollar is inching higher against the Yen on Friday. At the time of writing, the greenback is up 30 pips (0.24 percent) to 133.30. This follows a healthy bounce on Thursday, which lifted USD/JPY 1 percent higher from the day’s low.

The dollar strength over the last two days is in stark contrast to Wednesday’s price action, when the dollar slumped against its major trading pairs.

US Inflation Cools

On Wednesday the Bureau of Labor statistics released the consumer inflation data for July. The headline Consumer Price Index (CPI) came in at 8.5 percent year on year. This was below the forecast 8.7 percent and way down on the 9.1 percent rate in June.

A risk-on mood sent US Indices screaming higher, and the dollar tumbling. As a result of the better-than-expected inflation number, odds of a 75bp interest rate hike at the next FOMC meeting skidded lower, adding to the dollar’s woes.

The yen managed one of its best trading days against the buck in over two years. USD/JPY fell almost over 2 percent after the headline, before paring the one-day decline to 1.7 percent. The bounce has continued in the two-days following, with the dollar way off Wednesday’s low.

Fed Speakers

The dollar’s reversal follows speeches and remarks from a slew of Federal Reserve officials advising investors not to get too excited by this week’s minor drop in inflation data. Subsequently talk of a less-hawkish fed has given way to the belief that a 75bp hike is still on the cards. With this in mind, USD/JPY may continue to track higher as bearish trades are unwound.

US Dollar to Yen Outlook

The daily chart shows the Yen has fallen sharply against the US dollar this year.

USD/JPY reached a 24-year high of 139.38 in July, before retreating around 7 percent to 130.39 in early August.

The Yen’s weakness comes as the Bank of Japan (BOJ) remains steadfast in supporting the economy with low interest rates. Unlike many central banks the BOJ is keeping interest rates below zero to kick-start spluttering GDP. By doing so, they hope to see increased demand from institutions that send money to Japan to pay for the country’s exports.

The downside to this is the weaker currency increases the cost of the nation’s imported energy which is typically priced in US dollars. This had led to growing calls for the BOJ to initiate tightening measures.

For now however, the path of least resistance for USD/JPY is higher. That is until such a time, the BOJ is forced to act.

USD/JPY Exchange Rate Price Chart

Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.