USD/JPY recovers from nine-month lows after US inflation data release

USD/JPY returned to near-year lows following the release of US inflation data.

The data show inflation is falling at a broadly expected pace, but reduce the likelihood of a 50 basis point rate cut from the Fed.

The JPY is supported by BoJ’s Nakagawa comments suggesting an interest rate hike is on the way.

USD/JPY recovers to trade just below 141.00 after dropping to a new nine-month low on Wednesday. The rebound follows the release of US inflation data.

US data is leading the US dollar (USD) higher on prospects of a more measured approach to easing from the Federal Reserve (Fed), while the Japanese yen (JPY) is trading firm after comments from the Bank of Japan (BoJ). ) officially suggested that an interest rate hike is closer than previously thought.

US consumer prices rose largely as expected in August, although the annual change in the consumer price index (CPI) beat economists’ expectations by a point, revealing a 2.5% rise instead of the 2.6 forecast %, according to data from the US Bureau of Labor Statistics on Wednesday.

Core CPI (ex food and energy) also rose as expected, but monthly core CPI rose a more than expected 0.3%, suggesting some stubbornness in core prices, which analysts blame it on stuck house prices.

The data indicated that inflation remains high enough for the Fed not to implement a “jumbo” cut of 50 basis points (bps) at its next meeting, but rather take a more measured approach. The odds of a 50bps (0.50%) cut at the September 17-18 Fed meeting fell to just 15% after the release, from about 27% beforehand. Meanwhile, a 25 bps (0.25%) cut remains fully priced in, according to CME’s FedWatch tool.

“Overall, inflation appears to have been successfully contained, but with housing inflation still refusing to moderate as quickly as hoped, it has not been completely defeated. Under these circumstances, we expect the Fed to take a measured approach to cutting interest rates,” noted Paul Ashworth, chief economist for North America at Capital Economics.

With the odds of a further US rate cut fading, the USD strengthened and USD/JPY rose. Relatively higher interest rate expectations usually support a currency because they lead to greater inflows of foreign capital.

Meanwhile, the Japanese Yen (JPY) is trading after comments from BoJ Governing Council member Junko Nakagawa recently hinted at another rate hike. Japanese labor cash earnings for July also beat expectations, which continues to support the case for further BoJ policy normalization.

“Nakagawa stressed that the BoJ will adjust policy if economic forecasts materialize, signaling that Japan’s low real rates may need to tighten sooner than expected,” Saxo Bank said in a research note on Wednesday.