USD/JPY edges up above 153.50 with all eyes on US CPI figures

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The US Dollar (USD) found support at 152.30 against the Japanese Yen (JPY) and is trimming some losses on Friday, returning to the upper range of the 153.00s.

USD/JPY appreciates above 153.00 but remains on track for a 2.4% weekly loss.
Trading volumes remain subdued on Friday, ahead of the IS CPI release.
The Yen remains supported by hopes of a stable government and calls for further BoJ tightening.

The US Dollar (USD) found support at 152.30 against the Japanese Yen (JPY) and is trimming some losses on Friday, returning to the upper range of the 153.00s. The risk-averse sentiment is providing support to the USD, although upside attempts remain limited, ahead of the release of the US Consumer Price Index (CPI) report.

Consumer inflation is expected to have grown at a steady 0.3% pace in January, but the year-over-year CPI is forecast to have eased to 2.5% from 2.7% in December. Likewise, the core CPI, more relevant from the Federal Reserve’s (Fed) point of view, is expected to have eased to 2.5% in January, from 2.6% in the previous month.

The risk, in this case, is skewed to the downside. A string of weak US economic indicators seen in recent weeks has added pressure on the US central bank to lower borrowing costs further. With this in mind, a larger-than-expected decline in price pressures might boost hopes of upcoming Fed cuts and weigh on the US Dollar.

The USD/JPY’s broader trend, however, remains bearish with the Japanese currency on track for its best weekly performance in more than one year. Prime minister’s Takaichi’s landslide victory has been celebrated by the market as a guarantee of a steady government, while concerns about her fiscal policies have taken a back seat.

Earlier on Friday, Bank of Japan’s (BoJ) member Naoki Tamura reiterated that interest rates remain “considerably distant” to the neutral rate and that the economy is close to achieving the 2% inflation target. These comments suggest that he might call for another rate hike at the March meeting, which has provided additional support to the JPY.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.