160 in sight: Japanese Yen weakens as US inflation fuels Fed hike bets

• A two-month low 2 for USD/JPY comes as above-forecast US inflation and hawkish Fed comments support the US Dollar.
• An 11.5% probability of a half-point increase accompanies full market pricing of a December Fed rate rise.
• Despite pressure on the Japanese Yen from the wide US–Japan interest rate differential, traders remain wary of another intervention.

159.13 is the approximate USD/JPY level at the time of writing. The pair is up 0.24% on the day, reaching its highest level since 2 September. Wednesday’s modest advance marks a second consecutive day of gains. Expectations of a more hawkish Federal Reserve (Fed) outlook have revived bullish momentum in the US Dollar (USD).

Trading near 102.50, the US Dollar Index (DXY) is nearing October’s year-to-date peak of 102.94. The index measures the Greenback against a basket of six major currencies. Support for the US currency has come from Tuesday’s stronger-than-forecast consumer inflation figures and Fed officials’ calls for additional monetary tightening.

At 0.4% MoM in October, the 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%. That matched September’s rate and surpassed expectations of 0.2%.

A half-point December rate increase may be necessary if October core CPI is “around 0.3% or higher.” That was the assessment of Fed Governor Christopher Waller. Further monetary tightening also received support from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson. Fed Vice Chair for Supervision Michelle Bowman emphasised the need to bring inflation under control.

According to the CME FedWatch Tool, a December rate rise is now fully priced in. Markets assign an 88.5% probability to a 25-basis-point (bps) increase and an 11.5% probability to a 50 bps move. Expectations extend to further tightening next year, with pricing pointing to three additional quarter-point rises by mid-2027.

With the Bank of Japan’s (BoJ) policy rate at 1.25% against the Fed’s 3.75%-4.00% range, Japan’s much lower interest rates continue to weigh on the Japanese Yen (JPY). The BoJ’s gradual rate-hiking course provides only limited support for the currency. Further Fed tightening could leave the interest rate differential between the two countries wide.

As USD/JPY nears 160, however, traders remain alert to the possibility of another currency intervention. Japan has intervened several times this year to support the Yen, with a record ¥7.98 trillion operation on 30 July among those moves. Earlier this month, Finance Minister Satsuki Katayama warned that the authorities would respond to disorderly or excessively speculative currency movements.