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

USD/JPY bounces off almost-yearly lows following the release of US inflation data. 

The data shows inflation falling at a broadly expected pace but reduces the probability of a 50 bps rate cut from the Fed. 

JPY is supported by comments from BoJ’s Nakagawa hinting that an interest rate hike is in the pipeline. 

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

The US data lleads to an appreciation in the US Dollar (USD) amid prospects of a more measured approach to easing from the Federal Reserve (Fed), whilst the Japanese Yen (JPY) trades overall firm after comments from a Bank of Japan (BoJ) official suggested an interest rate hike was closer at hand than previously thought.  

US consumer prices mostly rose in line with expectations in August although the annual change in the headline Consumer Price Index (CPI) did undershoot economists’ expectations by a point, revealing a rise of 2.5% 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 by a higher-than-expected 0.3% suggesting some stubbornness in core prices, which analysts put down to sticky dwelling prices. 

The data indicated that inflation remains sufficiently high for the Fed not to implement a "jumbo" 50 basis points (bps) cut at its next meeting, but rather adopt a more measured approach instead. The probabilities of a 50 bps (0.50%) cut at the September 17-18 Fed meeting fell to only 15% after the release, from around 27% before. A 25 bps (0.25%) cut, meanwhile, remains fully priced in, according to the CME FedWatch tool. 

“Overall, inflation appears to have been successfully tamed but, with housing inflation still refusing to moderate as quickly as hoped, it hasn’t been completely vanquished. Under those circumstances, we expect the Fed to take a measured approach to cutting interest rates,” remarked Paul Ashworth, Chief North America Economist at Capital Economics. 

With the chances of the larger cut in US interest rates diminishing, the USD strengthened and USD/JPY rose. Relatively higher interest rate expectations are usually supportive of a currency because they lead to higher foreign capital inflows. 

The Japanese Yen (JPY), meanwhile, trades firm after comments from BoJ Board member Junko Nakagawa recently hinted at another rate hike. Japan’s Labor Cash earnings for July also exceeded expectations, which continue to support the case for further normalization of BoJ policy. 

“Nakagawa emphasized that the BoJ would adjust policy if economic projections materialize, signaling that Japan’s low real rates may need tightening sooner than expected,” said Saxo Bank in a research note on Wednesday.