Japanese Yen strengthens as US inflation fails to sustain Dollar rebound

• USD/JPY falls 0.54% on Friday and trades around 153.60 after briefly jumping to 154.49.
• US inflation remains unchanged at 3.4% in August, in line with expectations, while monthly core inflation comes in above forecasts.
• The Japanese Yen benefits from expectations of further monetary tightening in Japan ahead of next week's Bank of Japan decision.

USD/JPY falls 0.54% on Friday and trades around 153.60 at the time of writing. The pair initially jumped to 154.49 following the release of United States (US) inflation data before quickly erasing the entire move, as strength in the Japanese Yen (JPY) outweighs the initial rebound in the US Dollar (USD).

The US Consumer Price Index (CPI) rises 3.4% YoY in August, unchanged from the previous month and in line with market expectations, according to data released by the Bureau of Labor Statistics (BLS) on Friday. On a monthly basis, prices increase 0.4%, following a rise of just 0.1% previously.

The underlying figures also provide a slightly firmer signal. Core CPI, which excludes volatile food and energy prices, rises 0.3% on a monthly basis, exceeding the 0.2% forecast. On an annual basis, however, core inflation eases to 2.4% from 2.5% in July.

The US Dollar initially strengthens following the release, supported by the stronger-than-expected monthly increase in core inflation. However, this reaction quickly loses momentum against the Japanese Yen, which ranks among the strongest currencies this week.

The Japanese currency remains supported by expectations surrounding the Bank of Japan's (BoJ) upcoming monetary policy decision. Markets expect the central bank to remain on its monetary normalization path, with a potential 25-basis-point rate hike to 1.25% at next week's meeting, which would bring borrowing costs to their highest level in 31 years.

The combination of potentially tighter monetary policy in Japan and the US Dollar's fading momentum following the initial CPI reaction therefore supports the Japanese Yen and keeps USD/JPY under pressure around 153.60.