Dollar Slumps as Core Inflation Cools, Yen Soars

The USD/JPY plummeted over 1% in early North American trading as the latest US inflation data showed a deceleration in core prices. This unexpected cooling of inflation sent US Treasury yields tumbling and boosted the Japanese Yen.  

The US Bureau of Labour Statistics reported that consumer prices rose 0.4% month-over-month in December, slightly above the expected 0.3%. However, the annual inflation rate remained at 2.9%, as anticipated.  

More significantly, core inflation, which excludes volatile food and energy prices, increased by only 0.2% month-over-month, matching expectations. This brought the year-over-year core inflation rate down to 3.2% from 3.3% in November, defying economists’ forecasts.

Yen Gains Momentum on Hawkish BoJ Signals

The Yen strengthened significantly, pushing the USD/JPY pair below the 157.00 level. This move coincided with a sharp decline in US 10-year Treasury yields, which plunged over 12 basis points to 4.661%.

Earlier in the Asian session, Bank of Japan Governor Kazuo Ueda delivered hawkish remarks, stating that the central bank would consider raising interest rates and adjusting its monetary policy if economic conditions improve and inflation pressures persist. He emphasized the importance of upcoming spring wage negotiations and highlighted positive assessments from regional branch managers regarding wage growth.  

Fed Speeches and Economic Data to Shape Direction

Later in the day, several Federal Reserve officials, including Thomas Barkin, Neel Kashkari, and John Williams, are scheduled to make public appearances. Their comments on the economic outlook and monetary policy will be closely watched by market participants.

Additionally, key US economic data, including retail sales and jobless claims figures, will be released on Thursday. These data points will further influence market sentiment and the direction of the USD/JPY pair.

Technical Factors

The USD/JPY pair remains in an uptrend, but the recent decline suggests a potential short-term reversal. The break below the Tenkan-sen, a key technical indicator, has opened the door for further losses.  

Support levels for the pair include 156.00, followed by the Kijun-sen at 154.94. If these levels are breached, the 50-day Simple Moving Average (SMA) at 154.74 could provide further support.  

Key Developments:

The unexpected slowdown in US core inflation triggered a sharp decline in the USD/JPY pair.

Hawkish remarks from BoJ Governor Ueda further supported the Yen’s strength.  

Upcoming Fed speeches and key economic data releases will be crucial for determining the future direction of the USD/JPY pair.

The technical outlook suggests a potential short-term reversal in the uptrend for the USD/JPY pair.