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USD/JPY drops sharply after US CPI figures

  • USD/JPY drops more than 2.0% after US CPI data misses estimates.
  • Data brings US inflation closer to Fed’s 2.0% target.
  • This increases the likelihood that the Fed will cut interest rates in the short term, weakening the US dollar in the process.

He USD/JPY is in free fall, trading more than 2.0% lower at 157.90, following the release of the US Consumer Price Index (CPI) for June, which showed a slowdown in inflationary pressures in the US economy.

The CPI data brings US inflation closer to the Federal Reserve’s (Fed) 2.0% target and makes it more likely that the central bank will cut short-term interest rates. This, in turn, is negative for the US Dollar (USD) (and USD/JPY) as lower interest rates attract less foreign capital inflows.

Meanwhile, the Japanese Yen (JPY) finds support after Japan’s factory price inflation data showed a sharp rise in June. The PPI rose 2.9% year-on-year in June, beating the previous month’s reading of 2.6% and in line with consensus expectations. It was the fifth consecutive month of increases for the gauge, the 41st consecutive month of PPI inflation, and the highest reading since August 2023.

USD/JPY Daily Chart

USD/JPY falls sharply after US CPI data disappoints expectations

USD/JPY is falling rapidly after the US CPI release revealed that prices rose 3.0% year-on-year in June, below estimates of 3.1% and 3.3% in the previous month.

The CPI fell 0.1% on a monthly basis in June, when economists had expected a rise of 0.1% from 0.0% in May.

Core CPI, which excludes the volatile food and energy components, slowed to 3.3% year-on-year, below expectations of 3.4% and 3.4% in the previous month. On a monthly basis, core CPI rose 0.1%, below the 0.2% expected and 0.2% in May.

The data makes it more likely that the Fed will start cutting short-term interest rates, which is negative for the US dollar. Market-based indicators suggest a probability of around 70% of a cut in September, according to the CME FedWatch tool.

The fall could be limited by the outlook for the Yen

Despite the USD/JPY falling on the back of the lower US inflation reading and its contrast with the Japanese PPI inflation data for the same period, the downside of the USD/JPY pair could be limited as the prospects of the Bank of Japan (BoJ) substantially raising interest rates remain low.

Although the chances of the BoJ raising interest rates by 0.25% at its July meeting are high and this is supporting the Yen (negative for USD/JPY), the BoJ is not expected to start an aggressive tightening cycle where it raises interest rates meeting after meeting. Rather, it is expected to only make 0.35% interest rate hikes over the next 12 months, according to Dr. Win Thin, Global Head of Market Strategy at Brown Brothers Harriman, so “upward pressure” on Yen pairs is likely to persist.

The USD/JPY faces an additional risk of “covert intervention” by Japanese authorities, according to Sagar Dua, Editor at FXStreet. In late April and early May 2024, the Bank of Japan (BoJ) made direct market interventions to prop up the Yen. An overly weak Yen is seen as a risk to the financial stability of importers and encourages the “wrong kind” of inflation in the economy, according to Japanese policymakers, who have been warning of further interventions if the Yen continues to depreciate. This remains a risk factor for the USD/JPY.

Source: Fx Street

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