USD/JPY jumps as US inflation drops more than expected

The Japanese yen has posted gains on Wednesday. The yen gained as much as 1% but has given up about half of those losses on the day. At the time of writing in the North American session, USD/JPY is trading at 155.73, up 0.45%.

US dollar slips as US CPI drops to 0.4%

US headline inflation didn’t drop by much, but it was enough to send the US dollar down against the major currencies. Headline inflation rose 0.3% m/m in April, just below the 0.4% gain in March and the market estimate of 0.4%. Annually, headline inflation dropped to 3.4%, matching the market estimate and down from 3.5% in March. The 3.4% gain marked the first time in four months that inflation was not higher than expected. Core CPI dropped from 3.5% y/y to 3.4% y/y and 0.4% m/m to 0.3 m/m. Both readings matched the market estimate.

Investors liked what they saw from the inflation report. Prior to the report, the likelihood of a September rate cut was 64% and rose to 71% after the report. The markets have fully priced in two rate cuts before the end of the year, but are they being too optimistic?

There wasn’t anything in the inflation release that would point to inflation falling to the 2% target in the near-term and Fed Chair Powell said on Tuesday that the Fed plans to maintain rates in restrictive territory. It will be interesting to see how Powell reacts to today’s inflation report.

Japan releases first-quarter GDP on Thursday and the economy is expected to bounce back. The market estimate stands at 0.1% q/q, compared to -0.4% in Q4 2023. Annually, GDP is expected to climb 0.4% y/y, after a 1.5% decline in the fourth quarter.

USD/JPY Technical

• USD/JPY tested support at 154.83 earlier. Below, there is support at 153.72
• There is resistance at 156.88 and 157.99

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