Last week’s release of US inflation data sent the foreign exchange market into convulsions. It notably affected the USD/JPY exchange rate. Investors are cheering the new inflation data to the skies. These figures are a sign that inflation levels have stabilized, raising the prospect of inflation moving toward the Federal Reserve’s 2% target by the end of this year. The USD/JPY currency pair jumped up to nearly 159.00 on Tuesday. This increase represented a height not seen since July 2024.
In the United States, headline inflation is currently notching 2.7% year-on-year. This stability shows that the net of all price pressures is well managed. Core inflation, which removes volatile food and energy prices, told a different story. The Core Consumer Price Index (CPI) increased by 0.2% MoM. This was still less than what analysts had expected at a 0.3% increase. Importantly, this spike was concentrated on matching the prior month’s reading. On an annual basis, core inflation was at 2.6%, below the consensus expectation of 2.7%.
The August inflation numbers are out, and their news is bad. This, combined with last week’s labor market cooling signals, strengthens the case for the Federal Reserve to hold pat on its existing interest rate policy for the time being. Market participants are almost universally anticipating a lengthy pause in interest rate changes out until the end of the first quarter of 2024. They’re pricing in at least two rate cuts by the second half of the year.
The recent US Dollar strengthening has made things even worse for the Japanese Yen. Instead, as the Greenback continued to pick up momentum in the wake of that inflation report, the Yen lost even more ground against its American counterpart. As we write today, USD/JPY is about 159.00, which shows strong investor sentiment for the US economy.
Domestic factors have played a role in Japan’s Yen decline. Rumors of an early election in Japan have raised hopes for laxer fiscal policy and an expansionary political spending boom. This has led to fears about Japan’s already-mammoth debt load. This convergence of domestic economic drivers and external forces, particularly from US monetary policy, has continued to put downward pressure on the Yen.