Japanese Yen treads water below 158.50 ahead of the US CPI release

USD/JPY edges up on Wednesday, but remains within range, capped below the 158.50 area.
The US Dollar trades back and forth with investors awaiting the release of September's US CPI report.
Fed Williams cast doubt on Tuesday about the scope of the Fed's monetary tightening cycle.

Guillermo Alcala FXStreet

The Japanese Yen (JPY) is trading practically flat against the US Dollar (USD) on Wednesday, with traders in a “wait-and-see” stance, ahead of the release of September’s US Consumer Price Index (CPI) report. The USD/JPY pair hovers below the key 200-day Simple Moving Average (SMA) at 158.50, with downside attempts contained above 158.00.

Investors are wary of taking risks with all eyes on the US consumer inflation report, for further insight into the timing of the next Federal Reserve’s (Fed) interest rate hike. Headline inflation is expected to have accelerated to a 3.6% year-over-year (Y-o-Y) growth from 3.4% in August, while core inflation is forecast to show a more moderate uptick to 2.5% from 2.4% in the previous month.

Fed monetary tightening expectations diverge

Barring a big surprise, these figures are likely to strengthen the case for another rate hike in the next quarter of the year, most likely in December. The question, though, is what comes next. Futures markets are pricing in at least two more quarter-point hikes next year, according to the CME’s FedWatch Tool. The New York Fed President, John Williams, however, said on Tuesday that he sees no need for any further monetary tightening in 2027.

Analysts at MUFG/BTMU underscore the importance of the US inflation report for setting the near-term direction of rates, noting that “a softer print would help ease the broader risks” around market volatility.

The bank's experts, in the same line as pointed out earlier, affirm that “we remain sceptical that inflation pressures will continue to build and while we expect the Fed to hike again in December, we do not expect the Fed to deliver the two further rate hikes currently priced by the markets,” underscoring a more cautious stance versus prevailing market expectations.

The Yen, on the other hand, remains on the defensive, following softer-than-expected Japanese Producer Price Index (PPI) figures on Monday, and comments from Bank of Japan (BoJ) officials pointing to steady monetary policy at October’s meeting. BoJ Governor Kazuho Ueda reiterated the importance of keeping inflation anchored near the 2% target earlier this week, but he did not suggest any timing for the next interest rate hike.

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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