US inflation fuels Fed hike bets, driving Japanese Yen lower towards 160

• The US Dollar draws support from hawkish Fed comments and above-forecast US inflation, while USD/JPY touches a two-month low 2.
• A December Fed rate increase is fully priced into markets, which assign an 11.5% probability to a half-point hike.
• While the sizeable US–Japan interest rate differential puts pressure on the Japanese Yen, traders remain wary of fresh intervention.

Renewed bullish sentiment towards the US Dollar (USD) is pushing USD/JPY modestly higher on Wednesday for a second consecutive day, as investors anticipate a more hawkish outlook from the Federal Reserve (Fed). The pair is trading near 159.13 at the time of writing, a daily gain of 0.24% and its highest reading since 2 September.

Support for the Greenback has come from Tuesday’s above-forecast US consumer inflation release and Fed officials’ calls for additional monetary tightening. Measured against a basket of six major currencies, the US Dollar Index (DXY) stands near 102.50, closing in on October’s year-to-date peak of 102.94.

At 0.4% MoM in October, the rise in the US Consumer Price Index (CPI) exceeded the 0.3% estimate, though it moderated from September’s 0.6%. Excluding food and energy, core CPI increased by 0.3%, unchanged from September’s pace but above the projected 0.2%.

A half-point increase in December may be necessary if October core CPI registers “around 0.3% or higher.” That was the view expressed by Fed Governor Christopher Waller. Further tightening also received support from officials including Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson. Separately, Fed Vice Chair for Supervision Michelle Bowman emphasised the importance of bringing inflation under control.

According to the CME FedWatch Tool, a December rate increase is now fully reflected in market pricing: the probability of a 25-basis-point (bps) hike stands at 88.5%, against 11.5% for a 50 bps increase. Expectations extend to further hikes next year, with traders pricing in three additional quarter-point increases by mid-2027.

For the Japanese Yen (JPY), the substantial gap between Japanese and US interest rates remains a drag. The Bank of Japan’s (BoJ) policy rate is 1.25%, well below the Fed’s 3.75%-4.00% range. The BoJ continues to raise rates gradually, but this provides only limited backing for the Yen: expectations of additional Fed tightening could sustain the wide differential between the two countries.

As USD/JPY nears 160, however, traders remain alert to the possibility of renewed currency intervention. Several interventions have already been undertaken by Japan this year to bolster the Yen, including a record ¥7.98 trillion operation on 30 July. Earlier this month, Finance Minister Satsuki Katayama cautioned that authorities would respond to disorderly or excessively speculative currency moves.