USD/JPY gains as Fed rate hike odds keep Japanese Yen under pressure

• Elevated US CPI readings support a stronger USD/JPY, although easing US-Iran tensions may curb safe-haven demand and offset that support.
• Underlying inflation reaching the central bank’s 2% target prompted BoJ policymakers to call for a quicker pace of rate rises.
• Weak domestic spending and doubts over AI demand led several BoJ members to warn against tightening too quickly.

Markets now assign approximately a 91% probability to a Federal Reserve rate rise next month, according to the CME FedWatch Tool, after the latest inflation report reinforced expectations of an increase in December. The release provided firm support for the US Dollar (USD), helping USD/JPY advance for a second consecutive day to trade around 158.90 during Wednesday’s Asian session.

October’s US Consumer Price Index increased by 0.4% month on month, exceeding the 0.3% forecast despite slowing from September’s 0.6% rise. Excluding food and energy, Core CPI advanced 0.3%, unchanged from September’s pace but above the 0.2% estimate. Because of last year’s government shutdown, the Bureau of Labor Statistics did not publish annual figures for October.

Although the inflation readings favour the Dollar, waning demand for safe havens could weigh on the currency as prospects for a diplomatic settlement of the US-Iran conflict improve. Further military strikes on Iran might no longer be needed, US President Donald Trump indicated. At a G7 meeting, US Secretary of State Marco Rubio also said major combat operations were no longer necessary. Meanwhile, Congressional Democrats are considering using the approaching government funding deadline to steer the Trump administration towards a peaceful resolution.

Dollar gains support as Goolsbee’s ‘real inflation issue’ warning adds to hawkish Fed tone

An 8/10 FXS Speechtracker score, compared with a historical average of 6.8/10, marked a notably more hawkish message from the Fed’s Goolsbee and highlighted mounting concern over persistent price pressures. His description of the latest CPI as “borderline disturbing,” alongside services inflation “not coming down,” pointed to a lower threshold for further tightening or an extended period of restrictive policy. So did his warning of “a real inflation issue” that the Fed is “going to have to deal with,” a policy mix that generally favours the Dollar while weighing on risk-sensitive currencies. By repeatedly highlighting overheating prices and the danger of inflation expectations becoming entrenched, he reinforced the message that easing is likely to be postponed unless fresh data establish a clear disinflationary trend.

For the Japanese Yen (JPY), the summary of opinions from the Bank of Japan’s (BoJ) October meeting showed policymakers backing a faster pace of rate increases after underlying inflation reached the central bank’s 2% target. Expectations of a December rate rise were reinforced by one member’s explicit call for the BoJ to make its next increase "without becoming overly cautious,". Nonetheless, divisions remained evident in the summary: several members warned against proceeding too rapidly, pointing to subdued domestic consumption and doubts about the sustainability of AI-driven demand.

USD/JPY consolidates as rate spread struggles to sustain recent highs

A slightly softer interest-rate differential backdrop has drawn attention from analysts at Societe Generale, who observe that "10y UST/JGB spreads narrow to 216bp (-5bp), failing to gain foothold above 220bp." In their view, the spread’s fading momentum may account for USD/JPY’s more subdued performance as it consolidates around recent levels before key US data.