The USDJPY currency pair gathered bullish momentum in the early American session on Wednesday and reached a fresh weekly high near 154.50, up just over 1% on the day.
The US dollar is outperforming its rivals and helps USDJPY push higher following the January inflation data, which will influence the Fed’s monetary policy outlook.
The Bureau of Labor Statistics reported that the consumer price index (CPI) rose 3% on a yearly basis in January, above the market expectation and December’s increase of 2.9%. Additionally, the core CPI, which excludes volatile food and energy prices, increased 0.4% on a monthly basis.
Reflecting the broad-based USD strength, the DXY dollar index was up 0.5% on the day near 108.50. Additionally, the benchmark 10-year US Treasury bond yield rises nearly 2% on the day above 4.6%, further supporting the USD.
The inflation data is expected to influence market speculation for how long the Federal Reserve will keep interest rates in the current range of 4.25-4.50%. Signs of a slowdown in inflationary pressures would boost Fed dovish bets.
Meanwhile, sticky inflation data would suggest that the Fed should keep interest rates higher for longer.
According to the CME FedWatch tool, the Fed is almost certain to hold interest rates at their current levels in the March and May policy meetings. However, there is a 50% chance that the Fed could reduce interest rates in the June meeting.
On Tuesday, Fed Chair Jerome Powell reiterated on the first day of a two-day testimony at Capitol Hill that the central bank is in “no rush to cut interest rates” as the economy is “strong overall”, with a lower unemployment rate and inflation staying well above the 2% target.
Powell added, “We know that reducing policy restraint too fast or too much could hinder progress on inflation.”
Later in the day, the US Treasury will hold a 10-year note auction. Meanwhile, market participants will keep a close eye on headlines surrounding US President Donald Trump’s tariff policy.
European Commission President Ursula von der Leyen has threatened to take countermeasures against Trump’s 25% levy on steel and aluminum imports, while the ECB is expected to cut interest rates three times more this year.
(Source: OANDA)
