Japanese yen edges higher after US PPI rises

• US PPI rises 1%, missing estimate of 1.3%

The Japanese yen has edged higher on Friday. In the North American session, USD/JPY is trading at 144.80, down 0.3e%.

The US Producer Price Index followed the CPI’s lead and rose in December, with a gain of 1%. This was higher than the 0.9% gain in November but shy of the market estimate of 1.3%.

US inflation has been dropping over the past couple of months, which made the upswing in December’s CPI report a rude surprise. Inflation rose 3.4%, up from 3.1% in November and exceeded the market estimate of 3.2%.

The rise in US inflation is a reminder that the battle to bring inflation back to the 2% target will be bumpy. The Fed has done a good job in lowering inflation but the final phase could be the most difficult part of the battle. Services and housing inflation remains sticky and deflationary pressures from goods and energy have been fading.

Mester pours cold water on March rate cut expectations

The US economy remains strong despite the Federal Reserve’s steep rate-tightening cycle. The inflation report and last week’s nonfarm payrolls surprised on the upside, forcing the markets to trim expectations of a March rate cut. The markets have priced in a March move at around 70%, while the Fed hasn’t provided any details on its timeline for a rate cut.

Cleveland Fed President Mester pushed back against market expectations on Thursday, following the inflation release. Mester said that it was “too early” to cut rates in March because the upswing in inflation showed that restrictive policy was needed to bring down inflation to the 2% target. Inflation remains higher than the 2% target and Powell & Co. may want to stay on the sidelines until the second or third quarter and allow high rates to continue to push inflation lower.

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USD/JPY Technical

• There is resistance at 145.61 and 146.08
• 144.81 and 144.34 are providing support

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