Above-forecast US CPI weighs on Japanese Yen as Fed officials favour further rate hikes

Above-forecast US inflation supports the US Dollar, pushing USD/JPY higher.
At least two further rate increases are needed, says Dallas Fed President Logan.
Yen remains under pressure from the substantial US-Japan yield differential.

USD/JPY is trading near 158.76 at the time of writing. The pair is up 0.55% on Tuesday, supported by above-forecast US inflation and hawkish comments from Federal Reserve (Fed) officials that have boosted demand for the US Dollar (USD).

At 0.4% MoM, October’s rise in the US Consumer Price Index (CPI) exceeded the 0.3% forecast but slowed from September’s 0.6%. Excluding food and energy, core CPI increased 0.3%, unchanged from September and above the 0.2% forecast. No annual figures for October were released by the Bureau of Labor Statistics (BLS) because of last year’s government shutdown.

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A 12 basis point increase takes the benchmark 10-year US Treasury yield back to 5.00%. The US Dollar Index (DXY), meanwhile, advances 0.68% to about 102.38.

Calling for “at least two more 25-basis-point (bps) rate increases”, Dallas Fed President Lorie Logan said it “may be possible to move more rapidly this winter.” In her assessment, the policy rate remains at least 50 basis points short of a modestly restrictive level. She also highlighted inflationary pressures extending beyond wartime disruptions to energy supplies.

A half-point rate increase in December may be necessary if October core CPI registers “around 0.3% or higher.” That was Fed Governor Christopher Waller’s assessment ahead of the release. According to the CME FedWatch Tool, traders now price in an 89.2% probability of a 25-bps increase and a 10.8% probability of a 50-bps increase.

By contrast, the Bank of Japan (BoJ) continues to raise rates gradually, with its policy rate standing at 1.25%. Japan’s 10-year government bond yield is near 2.17%, around 283 basis points lower than the equivalent US yield. Rising US yields and a stronger US Dollar put pressure on the Japanese Yen. The possibility of additional Fed rate increases could also sustain the wide interest-rate differential between the US and Japan.

Fed officials’ comments and producer price releases from Japan on Thursday and the US on Friday will be the focus for USD/JPY traders. Japan’s economic calendar is otherwise light for the remainder of the week.

Today’s US Dollar Performance

The US Dollar recorded its largest gain against the Australian Dollar today. Its percentage moves against the major currencies listed are set out in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.63%	0.88%	0.56%	0.52%	1.11%	0.75%	0.88%
EUR	-0.63%		0.23%	-0.09%	-0.10%	0.47%	0.12%	0.24%
GBP	-0.88%	-0.23%		-0.34%	-0.33%	0.24%	-0.12%	0.00%
JPY	-0.56%	0.09%	0.34%		-0.02%	0.56%	0.19%	0.32%
CAD	-0.52%	0.10%	0.33%	0.02%		0.58%	0.21%	0.34%
AUD	-1.11%	-0.47%	-0.24%	-0.56%	-0.58%		-0.36%	-0.24%
NZD	-0.75%	-0.12%	0.12%	-0.19%	-0.21%	0.36%		0.13%
CHF	-0.88%	-0.24%	-0.01%	-0.32%	-0.34%	0.24%	-0.13%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following that row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.