USD/JPY claws back

After a huge rally last week, the Japanese yen has reversed directions today. USD/JPY is trading at 140.21, up 0.99%. On the economic calendar, Japan releases GDP for the third quarter. There are no economic events in the US today.

A week to remember

The US dollar dropped like a stone last week, courtesy of a soft inflation report that saw both the headline and core readings fall in October. Both readings were lower than expected, and investors pounced on the news, as stock markets soared and the US dollar took a tumble. The yen made the most of the dollar’s misery, as USD/JPY slumped by a massive 5.3% last week and dropped to a 10-week low. The market reaction to the inflation data looks a bit extreme, and this explains the dollar’s comeback today.

The soft inflation report has raised expectations that the Fed will put the brakes on its tightening, after pushing full speed ahead with four straight jumbo hikes of 0.75%. Fed policy makers aren’t bandying around the magical word “peak” to describe inflation just yet, but we are now seeing a change in terminology, such as “gradual” and “measured”. What is interesting is that the markets have gone giddy over a drop in inflation but appear to be ignoring the Fed’s warning that rates could end up higher for longer than expected. I don’t detect any signs of the Fed going dovish, but the markets are expecting a pivot, as there is already talk in the markets of the Fed cutting rates in H2 of 2023.

The dollar is dusting itself off after last week’s disaster, and the yen may have trouble holding onto last week’s impressive gains. The Fed will almost certainly raise rates in December by at least 0.50%, and with the Bank of Japan maintaining a cap on JGB yields, the US/Japan rate differential will continue to widen. That spells trouble for the yen, which has lost about 20% against the dollar this year.

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USD/JPY Technical

• USD/JPY is testing resistance at 139.91 and 141.61
• There is support at 137.34 and 135.90

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