Yen Dips Ahead of Key Inflation Data

11/17/2022

1 minute read

2022.11.17 09:57

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The Japanese yen continues to flirt with the 140 level. In the European session, is trading at 140.25, up 0.51%.

Japan releases the October later today, which is expected to rise to 3.5%, following the September reading of 3.0%. Inflation has been on the rise and is above the BoJ’s target of 2%, although these are levels that other major central banks can only dream about.

The Bank of Japan has no plans to change its ultra-loose policy, even though inflation is above the target and the yen remains weak. BoJ Governor Kuroda reiterated his well-worn script earlier today that the rise in inflation is transitory, adding that he expects CPI to drop below 2% in fiscal year 2023. The yen has been on a tear in November, with gains of close to 6%, but that is more a case of dollar weakness rather than any newfound yen strength. With the Fed planning another oversize rate hike in December, the US/Japan rate differential will continue to weigh on the yen.

Fed Sends a Hawkish Message

The investor exhilaration which sent the stock markets rallying after the soft inflation report has taken a pause. Fed policy makers responded with a hawkish message, reminding the markets that the Fed was planning to raise rates higher than they had anticipated. The Fed speak may not have convinced investors to settle down, but a strong US report did the trick. The headline and core releases both posted strong gains of 1.3%, dampening sentiment that the Fed would pivot and ease its tightening. The US economy remains resilient and appears able to absorb further rate hikes without triggering a deep recession. Interest rates are expected to peak at 5% or slightly higher, which means that the Fed is highly likely to continue tightening into next year.