Japanese Yen: CPI risks dominate against US Dollar – MUFG

MUFG’s Lee Hardman and Abdul-Ahad Lockhart note that recent US Dollar (USD) resilience and higher US yields have created a tougher backdrop for FX carry trades, while commodity-linked currencies lag. They highlight that today’s United States (US) Consumer Price Index (CPI) is pivotal for the Federal Open Market Committee (FOMC) outlook, with a hot print seen pushing USD/JPY towards 161.00–162.00 and a soft reading pulling it back below 160.00.

CPI outcomes mapped to USD/JPY levels

"At the same time, the recent pick-up in US yields and stronger US dollar has created a more challenging backdrop for carry trades in the near-term."

"With the distribution of outcomes unusually wide, today’s CPI release carries heightened potential for outsized market moves relative to recent data prints."

"A hot CPI print (>4.3%) today would likely trigger a sharp sell-off in US front-end rates as markets price in a higher probability of further Fed tightening, potentially pulling forward expectations for a hike towards October."

"The USD would rally on widening rate differentials, pushing USD/JPY up towards 161.00–162.00."

"While a soft print (<4.0%) would trigger lower US yields and a weaker US dollar pulling USD/JPY back below 160.00."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)