Japanese Yen falls as US CPI beats forecasts, Fed officials back further hikes

USD/JPY strengthens on Tuesday as stronger-than-expected US inflation and hawkish remarks from Federal Reserve (Fed) officials lift demand for the US Dollar (USD). At the time of writing, the pair trades around 158.76, up 0.55% on the day.

The US Consumer Price Index (CPI) rose 0.4% MoM in October, above the 0.3% forecast but down from 0.6% in September. Core CPI, which excludes food and energy, rose 0.3%, matching September’s pace and beating the 0.2% forecast. The Bureau of Labor Statistics (BLS) did not publish annual figures for October because of last year’s government shutdown.

The US Dollar Index (DXY) climbs 0.68% to around 102.38, while the benchmark 10-year US Treasury yield rises 12 basis points to reclaim 5.00%.

Dallas Fed President Lorie Logan said the Fed needs “at least two more 25-basis-point (bps) rate increases” and that it “may be possible to move more rapidly this winter.” She said the policy rate is at least 50 basis points below a modestly restrictive level and pointed to inflation pressures beyond wartime energy disruptions.

Before the release, Fed Governor Christopher Waller said a half-point rate hike may be needed in December if October core CPI comes in “around 0.3% or higher.” Traders now assign an 89.2% chance to a 25-bps hike and a 10.8% chance to a 50-bps hike, according to the CME FedWatch Tool.

Meanwhile, the Bank of Japan (BoJ) remains on a gradual rate-hiking path, with its policy rate at 1.25%. The 10-year Japanese government bond yield sits near 2.17%, roughly 283 basis points below its US counterpart. Higher US yields and a firmer US Dollar weigh on the Japanese Yen, while the prospect of further Fed hikes could keep the gap between US and Japanese interest rates wide.

With a light Japanese economic calendar for the rest of the week, USD/JPY traders will focus on remarks from Fed officials and producer price data from Japan on Thursday and the US on Friday.