USD/JPY stabilizes after US inflation-driven decline
The price of USD/JPY has fallen in recent weeks to retest major support at 139. Despite the monetary policy differential in favor of the dollar, USD/JPY is down 8% since its peak on October 21 following some less hawkish rhetoric from some Bold members and encouraging signs of inflation. In fact, both the CPI and PPI indexes for October came out weaker than expected, fueling investor speculation about less monetary tightening than originally expected by the Fed.
The Fed’s terminal rate thus fell from more than 5% in October to below 5%. It is possible that the operators are right to foresee a terminal rate below 5%, but this will essentially depend on the persistence of inflation.
If US inflation falls, it will increase the chances of less monetary tightening by the Fed, adding pressure on USD/JPY despite the Bank of Japan’s still extremely accommodative monetary policy. Conversely, sustained inflation at very high levels will support USD/JPY.
USD/JPY Daily Price Chart – Key Levels