USD/JPY pulls back from three-month peak after rise in Japanese factory-gate inflation

• USD/JPY pulls back after the Japanese Yen strengthens following release of Japanese Producer Price Index for October. 
• Higher prices could filter through into broader inflation and lead the BoJ to hike interest rates, strengthening JPY. 
• The US Dollar remains underpinned by still-high US inflation data and expectations of US fiscal and trade policy. 

USD/JPY retreats after reaching a new three-month high on Wednesday after the release of Japanese factory-gate price inflation data (producer prices) supported the Japanese Yen (JPY) after they showed a higher-than-expected rise in October. The increase in producer prices  could filter through into consumer prices, pushing up the main consumer inflation indexes. This, in turn, is likely to make the Bank of Japan (BoJ) raise interest rates, and higher interest rates strengthen a currency as they lead to increased net capital inflows. 

The US Dollar (USD) remains supported after the release of US Consumer Price Index (CPI) data showed headline inflation ticking higher in October, although all the readings were in line with economists forecasts. The stubbornly high inflation data is likely to keep the USD supported as it could encourage the US Federal Reserve (Fed) to reconsider cutting interest rates, resulting in a lift for the US Dollar. This in turn is likely to limit losses for the USD/JPY. 

Despite the pullback, USD/JPY continues to trade in a short and medium-term uptrend due to a strengthening US Dollar. This comes amid market expectations that President-elect Donald Trump’s mix of protectionism, higher tariffs and lower taxes will be inflationary for the US. This, in turn, is likely to flatten the trajectory for interest rates which had been expected to fall steeply. Although the market still sees odds of over 80% in favor of the Fed making a cut of 25 basis points (bps) (0.25%) to its main interest rate in December, according to the CME FedWatch tool, the outlook for 2025 may increasingly be more dependent on the inflationary impact (or not) of the new policies espoused by the Trump administration. 

The Japanese Producer Price Index (PPI) rose by 3.4% YoY in October from an upwardly revised 3.1% in the previous month and above the 3.0% expected. On month, PPI rose by 0.2% from an upwardly-revised 0.3% previously and above expectations of 0.0%. 

US headline CPI, meanwhile, rose by 2.6% YoY in October from 2.4% in the previous month and was in line with expectations. MoM headline CPI increased by 0.2% from 0.2% previously and the same expected. 

US Core CPI, meanwhile, rose by 3.3% in October, from the same in the previous month and 3.3% forecast. On month it rose by 0.3%, from the same both previously and expected. 

The BoJ’s October policy meeting Minutes, released on Sunday, revealed a divide among policymakers over the timing of future interest rate hikes. However, the Governor of the BoJ Katsuo Ueda has always said that if economic data meets the BoJ’s forecasts it will go ahead and hike rates. So far, the data has mostly met or exceeded estimates. In the meeting Minutes, the central bank maintained its forecast that it could raise its benchmark policy rate to 1.0% (from 0.25%) by the second half of fiscal 2025.