USD/JPY: the dollar returns to test major support at 139 yen

USD/JPY stabilizes after US inflation-driven drop

The price of USD/JPY has fallen in recent weeks to return to test major support at 139. Despite the monetary policy differential in favor of the dollar, USD/JPY has fallen 8% since its peak on October 21 following somewhat less hawkish rhetoric from some Fed members and encouraging signs about inflation. In fact, the CPI and PPI indexes for October both came out weaker than expected, which fueled investor speculation about less monetary tightening than initially expected by the Fed.

The Fed’s terminal rate thus fell from more than 5% in October to less than 5%. It is possible that operators are right to anticipate a terminal rate below 5%, but this will essentially depend on the persistence of inflation.

If US inflation dips, it would increase the chances of less monetary tightening from the Fed, which would increase the pressure on the USD/JPY, despite the Bank of Japan’s still extremely accommodative monetary policy. Conversely, a persistence of inflation at very high levels would support the USD/JPY.

USD/JPY daily price chart – key levels


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