Yen soars after US inflation surprise

The Japanese yen has skyrocketed in today’s North American session. USD/JPY is trading at 141.81, down 3.1%.

US inflation drags down the dollar

The October inflation report was lower than expected, triggering a mass rush from the US dollar. The yen has jumped on the bandwagon and risen to its highest level since September 22nd.

Inflation didn’t exactly tumble, but investors seized on the fact that both the headline and core readings were lower than projected, raising hopes of a soft landing for the economy. Headline CPI dropped to 7.7%, down from 8.2% in September and below the consensus of 8.0%. Core inflation slowed to 6.3%, down from 6.6% and lower than the forecast of 6.5%.

The surprisingly low numbers have turned rate pricing on its head. Prior to the inflation release, the markets had priced in 55% for a 50 bp increase and 45% for a 75 bp hike. This has changed to 80-20 in favor of a 50 bp hike, which has sent the US dollar into a broad retreat. Despite the festive mood on Wall Street today, the Fed hasn’t turned dovish – a 0.50% rate hike is still a sizeable move, and the terminal rate could end up being as high as 5.50%.

The yen has steamrolled the dollar today, but will this be just a blip in the yen’s prolonged descent? Today was all about US dollar weakness rather than any newfound strength in the yen. The next Fed meeting is a month away, with additional inflation and employment releases prior to the meeting. If those releases are stronger than expected, expectations of a 0.75% hike will grow and the US dollar will likely move higher. The US/Japan rate differential continues to widen and will keep weighing on the yen, with no sign that the Bank of Japan will throw the currency any lifelines. The dollar may have taken a licking today, but tomorrow is a new day.

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USD/JPY Technical

• USD/JPY has broken below several support levels today. The next support level is 139.66
• 147.07 and 147.74 are the next resistance levels

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