Japanese Yen languishes despite wholesale inflation accelerates in May

• USD/JPY steadies as the Japanese Yen receives no support after May wholesale inflation rose to a three-year high of 6.3%.
• Surging factory-gate inflation solidifies market expectations for an imminent hawkish interest rate pivot by the Bank of Japan.
• The US Dollar may regain ground on safe-haven demand after Iran’s IRGC claimed drone attacks on the US Fifth Fleet.

USD/JPY flatlines after experiencing volatility, trading around 160.40 during the Asian hours on Wednesday. The pair continues to hold its ground, reflecting a struggling Japanese Yen (JPY) that has failed to find support despite a massive acceleration in wholesale inflation. Driven by surging energy costs linked to the ongoing Middle East conflict, Japan’s Producer Price Index (PPI) jumped 6.3% year-over-year in May. This hot printing comfortably outpaced April’s upwardly revised 5.3% figure and surpassed market consensus of 5.5%, marking the fastest pace of wholesale price growth in three years.

This dramatic uptick in Japan’s factory-gate inflation has solidified market expectations for a hawkish pivot from the Bank of Japan (BoJ). With policymakers highly sensitive to the double-whammy of a sharply depreciating JPY and rising import costs, the central bank is widely expected to lift interest rates at its policy meeting next week. Traders are now closely parsing every signal from BoJ Governor Kazuo Ueda, as aggressive market speculation builds for consecutive rate hikes in September and December to rein in stubborn price pressures.

The USD/JPY pair may further appreciate as the safe-haven demand could support the US Dollar (USD), which could be attributed to the renewed Middle East tensions. Iran’s Islamic Revolutionary Guard Corps (IRGC) said it attacked the US Fifth Fleet in Bahrain with drones in response to US strikes on areas in southern Iran. The IRGC warned of “a more severe response” if what it describes as US “aggression” continues.

Earlier, the US launched a third wave of retaliatory strikes on Iranian coastal targets on Wednesday after Iran fired at least three ballistic missiles from Isfahan. This followed an initial round of US strikes on Tuesday, which Washington called a proportional response to Iran downing a US helicopter gunship near the critical Strait of Hormuz.

Stronger-than-expected US May jobs data have boosted expectations of a Federal Reserve (Fed) rate hike this year. Traders will take more cues from the US CPI report later in the day. The headline US CPI is expected to show a rise of 4.2% YoY in May, compared to 3.8% in April. The core CPI is projected to show an increase of 2.9% YoY during the same period, versus 2.8% prior.