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Japanese Yen Fundamental Outlook: USD/JPY Turns to US Inflation Report

Japanese Yen Fundamental Outlook: USD/JPY Turns to US Inflation Report

Daniel Dubrovsky, Senior Strategist

Japanese Yen Fundamental Forecast: Neutral

  • Japanese Yen gained ground as the US Dollar fell last week
  • Markets still eyeing 3 Fed rate hikes in 2023, a risk for JPY
  • USD/JPY eyeing the next US CPI report, will it miss estimates?
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The Japanese Yen slightly gained against the US Dollar this past week. This is despite what was probably the last 75-basis point rate hike from the Federal Reserve in this tightening cycle. Markets initially turned to risk aversion as the central bank inspired traders to add a 25-basis point rate hike to the policy outlook by mid-2023 – see chart below.

Traders were likely looking for signs of policy moderation. Did they get it? Yes and no. On the one hand, the central bank opened the door to smaller incremental hikes going forward. On the other hand, Chair Jerome Powell noted that the central bank envisions a higher terminal rate than previously. In other words, policy tightening at a slower pace, but for longer than past seen.

Then on Friday, October’s non-farm payrolls report offered a mixed picture. On the one hand, the economy added more jobs than expected. On the other hand, the unemployment rate climbed as average hourly earnings moderated. At the end of the day, markets punished the US Dollar. On the same day, several Fed speakers noted that front-loading rates hikes are likely behind us.

As the focus shifts to a slower pace of tightening and where rates could end, perhaps markets took that as a step closer to the end game. Traders might have also taken the opportunity to unwind bullish USD exposure to book profits given the Greenback’s resilient performance this year. Treasury yields were little changed on Friday, hinting that market pricing of the Fed’s outlook barely changed.

What does this mean for the Yen in the week ahead? Until the Fed offers a material pivot, it remains hard to see JPY managing a notable comeback against the US Dollar, absent possible intervention risk. All eyes turn to October’s US CPI report. A softer-than-expected outcome could add fuel to the endpoint for the Fed. That would be the best-case scenario for the Yen, which is still tied to a quite dovish Bank of Japan.

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The Problem for the Japanese Yen

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--- Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com

To contact Daniel, follow him on Twitter:@ddubrovskyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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