The Japanese Yen (JPY) surrendered part of its recent gains against the US Dollar (USD) on Wednesday after the latest US inflation figures failed to generate a decisive market reaction. USD/JPY briefly declined to 158.58 before recovering toward 159.20.
US headline Consumer Price Index (CPI) increased 0.1% month-on-month in July, reversing June’s 0.4% decline. Annual inflation eased to 3.4% from 3.5%. Core CPI, excluding food and energy, rose 0.2% monthly after remaining unchanged in June, while the annual core rate slipped to 2.5% from 2.6%.
The data prompted traders to further scale back expectations for a Federal Reserve rate increase in September. According to the CME FedWatch Tool, the probability of a September hike fell to approximately 38%, compared with 44% before the CPI release. Expectations had already weakened following July’s softer-than-expected Nonfarm Payrolls report.
US Treasury yields moved modestly lower following the data, while the Dollar recovered from its initial decline. The US Dollar Index (DXY) was trading near 99.82 after reaching an intraday low around 99.61.
Although the CPI figures reduced the likelihood of an immediate Fed hike, they did not significantly alter the broader inflation outlook. Price pressures remain above the Fed’s 2% target, while elevated Oil prices could make disinflation more difficult and potentially limit the central bank’s ability to ease policy aggressively.
Geopolitical uncertainty is also providing support for the Greenback. Reuters reported, citing a senior Iranian source, that Tehran and Washington are not currently discussing an extension of the ceasefire, reducing hopes for a rapid improvement in regional tensions.
Meanwhile, the Yen remains vulnerable after relinquishing nearly half of its gains following recent coordinated US-Japan intervention. However, officials from both countries have indicated that further action remains possible if necessary, potentially discouraging traders from pushing USD/JPY decisively above the important 160.00 level.
Market attention now turns to Thursday’s Producer Price Index (PPI) releases from Japan and the United States for fresh clues on inflation and monetary-policy expectations.
Trade Idea: Consider buying USD/JPY near 158.80, targeting 160.00, while placing a stop-loss below 158.20 amid intervention risks.