USD/JPY takes a tumble after soft CPI

The Japanese yen is sharply higher on Tuesday. In the North American session, USD/JPY is trading at 134.97, down 1.95%.

US inflation underperforms again

The US dollar is in broad retreat after US CPI was softer than expected. The November reading dropped to 7.1% y/y, down from 7.7% in October and slightly lower than the 7.3% consensus. The trend was similar for core CPI, which dipped to 6.0%, down from 6.3% and below the consensus of 6.1%. We’ve seen this story before – equities jump and the US dollar slides after a soft CPI report, as the markets speculate that the Fed could make a dovish pivot in response to falling inflation.

What makes this inflation report even more interesting is that the Fed winds up its policy meeting on Wednesday. Today’s CPI data hasn’t changed the pricing of a 50-bp hike tomorrow, which has about an 80% likelihood. The markets will be listening carefully to the tone of Jerome Powell’s rate statement and follow-up remarks, hoping for clues about the next meeting in February. There is a strong chance that the Fed will hike by 25 bp and then take a pause – this would be significant because it would mean that the rate tightening cycle would terminate at 4.75%, below the 5.00% level or higher which many forecasts projected for the terminal rate.

In all the market enthusiasm, investors would be well to remember that even with the recent fall in inflation, it remains more than three times the Fed’s target of 2%. The battle with inflation is far from over and we are yet to hear the Fed utter the magic phrase that “inflation has peaked”.  Jerome Powell and Co. may continue to drum out a hawkish message, but the critical question is whether anyone in the market is listening.

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USD/JPY Technical

• USD/JPY broke below support at 136.20 earlier. This is followed by support at 1.3453
• There is resistance at 1.3734

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