USD/JPY Treads Water as Trade Talks and CPI Data Loom

The USD/JPY pair, up 0.25% at 144.95, clings to support above 144.90 as markets grapple with US-China trade talks and await Wednesday’s US Consumer Price Index (CPI) data. A hawkish tilt from Bank of Japan Governor Kazuo Ueda curbs Yen weakness, while trade optimism and interest rate expectations keep the US Dollar afloat. With volatility brewing, the pair’s next move could signal broader shifts in global risk sentiment.

Trade Talks Fuel Cautious Optimism

Negotiations in London between US officials, including Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, and China’s Vice Premier He Lifeng show progress, boosting risk appetite and lifting US equities. Potential easing of US export controls and increased Chinese rare earth exports—crucial for tech and defense—offer hope for supply chain relief. Yet, China’s exports to the US plummeted 35% year-over-year in May, the steepest drop since February 2020, underscoring the talks’ high stakes. A breakthrough could strengthen the US Dollar, pushing USD/JPY higher, but unresolved tensions might tilt flows toward the safe-haven Yen.

Bank of Japan’s Stance Bolsters Yen

Bank of Japan Governor Kazuo Ueda’s remarks that rates could rise if inflation nears 2% sustainably have tempered Yen declines. This cautious hawkishness suggests tighter policy ahead, narrowing the US-Japan interest rate gap. While immediate hikes seem unlikely, the signal restrains USD/JPY’s upside. The pair remains tethered to monetary policy divergence, with US rate expectations hinging on the upcoming CPI data.

CPI Data to Set the Tone

Wednesday’s US CPI report is critical. Headline inflation is expected to climb to 2.5% year-over-year in May from 2.3%, with a 0.2% monthly rise. Core CPI, excluding food and energy, is forecast to increase 0.3% month-over-month, up from 0.2%, with the annual rate ticking to 2.9% from 2.8%. A hotter-than-expected print could cement Federal Reserve rates at 4.25%-4.50%, lifting the US Dollar and testing USD/JPY resistance at 145.50. A softer report might weaken the Greenback, bolstering the Yen. Strong Nonfarm Payrolls data, with 139,000 jobs added in May against 130,000 expected, already reduced pressure for near-term Fed cuts, with a 54.7% chance of a 25-basis-point cut in September per the CME FedWatch Tool.

Where Is USD/JPY Headed?

The USD/JPY pair stands at a crossroads. A robust CPI could drive it toward 146.00, signaling Dollar strength, while trade progress or a dovish inflation print might cap gains, with support at 144.50 or the 50-day moving average near 144.20. Geopolitical risks, like Iran’s nuclear tensions, could spur Yen demand. Markets brace for sharp moves as data and diplomacy reshape sentiment. The pair’s tight range belies a brewing storm—watch closely.