USD/JPY stabilizes ahead of US inflation data

The USD/JPY pair has stabilized at 149.33 as markets await crucial US inflation data, affecting the Fed policy outlook. The US January CPI is expected to decline, fueling discussions on the Fed’s easing timeline amid calls for patience.

The Federal Reserve is unlikely to alter rates in March, but May divided on potential for rate cuts. The Bank of Japan has expressed that it is in no rush to normalize policy until wages sustainably pick up.

Traders turned cautious as Wall Street erased previous gains, with the Nasdaq and S&P 500 edging lower. The US Department of Labor is expected to release January’s Consumer Price Index (CPI) expected to dip from 3.4% to 2.9% YoY, while Core CPI is foreseen at 3.7%, down from 3.9%. If the data comes as expected, that will open the door to ease policy in the near term.

Federal Reserve officials pushed back against slashing rates sooner than expected, with Fed Governor Michelle Bowman saying it is too soon to project when the Fed will cut rates. The Fed is expected to keep rates unchanged at 5.25%-5.50% on the March meeting, but in May, there’s a 52% chance for a first 25 basis points cut.

On the Japanese front, the 2023 Q4 Gross Domestic Product on Thursday is expected to recover from -0.7% Q3 contraction to 0.3%. Further data is revealed, including January PPI and Machine Tool Orders.