USD/JPY rises toward 159.00 as Dollar firms after US inflation data

• USD/JPY climbs toward 159.00 as the US Dollar strengthens after the CPI report.
• US headline inflation met forecasts, while core CPI softened modestly.
• Rising political uncertainty in Japan keeps the Yen under pressure.

The Japanese Yen (JPY) weakens further against the US Dollar on Tuesday as the Greenback strengthens following the release of the latest US inflation report. USD/JPY trades around 159.00 at the time of writing, hovering near levels last seen in July 2024.

According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 0.3% MoM in December, matching market expectations and unchanged from November. On an annual basis, headline inflation held steady at 2.7%, also in line with forecasts.

Meanwhile, core CPI, which excludes volatile food and energy components, increased 0.2% MoM, coming in below expectations of 0.3% and matching the previous month’s reading. On a yearly basis, core inflation stood at 2.6%, undershooting the 2.7% market forecast and unchanged from November.

From a monetary policy perspective, inflation remains above the Federal Reserve’s (Fed) 2% target but shows little sign of re-accelerating, reinforcing expectations that the central bank will stick to a gradual easing path.

Combined with last week’s mixed US labour-market data, the report has strengthened the case for the Fed to keep interest rates unchanged in the near term, with markets widely expecting a prolonged pause through the first quarter.

US President Donald Trump reiterated his criticism of Federal Reserve Chair Jerome Powell following the inflation release. In a post on Truth Social, Trump said the inflation numbers were ‘great’ and again labelled Powell ‘Too Late,’ urging the Fed to cut interest rates.”

Trump’s remarks come at a sensitive time as concerns over the central bank's independence have intensified following reports of a criminal investigation linked to Powell’s testimony on the Fed’s headquarters renovation.

Traders also parsed comments from St. Louis Fed President Alberto Musalem, who struck a cautious tone on the policy outlook. Musalem said he sees ‘little reason for further easing of policy in the near term,’ adding that policy is ‘well positioned to balance risks on both sides’ and is ‘right around neutral.’ While he described the latest inflation reading as encouraging for views that inflation will converge toward 2% this year.

Beyond US-driven moves, the Yen has also remained under pressure from domestic factors. Political uncertainty in Japan has intensified after reports suggested Prime Minister Sanae Takaichi may dissolve the lower house and call a snap general election as early as February.

The prospect of an early vote has fueled expectations of looser fiscal policy and heavier political spending, reviving concerns over Japan’s already large debt burden and adding to downside pressure on the currency.