The USD/JPY pair exhibits strength as elevated US CPI figures counterbalance diminished demand for safe-haven assets, coinciding with a reduction in tensions between the US and Iran. BoJ policymakers advocated for more rapid rate increases following the achievement of the central bank’s 2% inflation target. Several members of the Bank of Japan expressed caution regarding premature tightening, highlighting weak domestic consumption and the ambiguity surrounding demand for AI. USD/JPY continues to build on its upward momentum for the second consecutive day, currently hovering around 158.90 during the Asian trading session on Wednesday. The pair gained ground as the US Dollar received firm support following the latest inflation report, which cemented market expectations for a Federal Reserve rate hike in December. According to the CME FedWatch Tool, markets are currently assigning about a 91% probability to a rate increase in the upcoming month.
The US Consumer Price Index increased by 0.4% month-over-month in October, surpassing the forecast of 0.3%, despite a deceleration from the 0.6% increase observed in September. Meanwhile, Core CPI, which excludes food and energy prices, increased by 0.3%, aligning with the pace observed in September and surpassing the estimated 0.2% increase. The Bureau of Labour Statistics did not release annual figures for October as a result of the previous year’s government shutdown. Despite these bullish inflation metrics, the Greenback may encounter challenges from a decline in safe-haven demand as optimism increases for a diplomatic resolution to the US-Iran conflict. US President Donald Trump indicated that additional military strikes against Iran may no longer be essential, while US Secretary of State Marco Rubio remarked at a G7 meeting that significant combat operations were no longer needed.
At the same time, Congressional Democrats are considering leveraging the impending government funding deadline to prompt the Trump administration to pursue a peaceful resolution. Fed’s Goolsbee delivered a distinctly more hawkish tone, with an 8/10 FXS Speechtracker score standing well above the 6.8/10 historical average and underscoring rising concern about sticky price pressures. The emphasis that the latest CPI was “borderline disturbing,” with services inflation “not coming down,” and the warning of “a real inflation issue” that the Fed is “going to have to deal with,” signals a lower bar for additional tightening or a longer period of restrictive policy, a mix that is typically supportive for the Dollar and negative for risk-sensitive currencies. Repeated references to overheating prices and the risk of inflation expectations becoming entrenched reinforce the message that policy easing is likely to be delayed unless incoming data show a clear disinflation trend.
On the Japanese Yen side of the equation, policymakers at the Bank of Japan expressed their backing for an acceleration of rate hikes following the achievement of the central bank’s 2% inflation target, as detailed in the summary of opinions from its October meeting. One member explicitly urged the BoJ to execute its next increase “without becoming overly cautious,” reinforcing expectations for a rate hike at the December meeting. However, the summary also highlighted a persistent divide among policymakers, as several members expressed caution regarding a rapid transition in light of sluggish domestic consumption and the uncertain sustainability of AI-driven demand. Analysts highlight that the rate differential backdrop has softened slightly, noting that “10y UST/JGB spreads narrow to 216bp (-5bp), failing to gain foothold above 220bp.” They suggest this loss of momentum in the spread may help explain the more contained tone in USD/JPY as the pair consolidates near recent levels ahead of key US data.
