Is US inflation reshaping the markets?

The USD/JPY pair continues to record notable gains, surpassing the 154.00 level during the second half of Wednesday’s session, driven by stronger-than-expected U.S. inflation data.

This upward movement reflects financial markets’ response to inflation and interest rate signals, as these factors directly influence currency movements and Treasury yields.

The rise in the Consumer Price Index (CPI) to 3% in January, exceeding expectations, sent a clear message to the markets that inflationary pressures remain persistent, reducing the likelihood of a Federal Reserve rate cut soon.

In my view, the immediate impact of this data was seen in the 2% rise in the 10-year U.S. Treasury yield, surpassing 4.6%.

This increase in yields strengthened the appeal of the U.S. dollar, as investors seek higher returns in an environment where monetary policy remains restrictive. As a result, the inverse relationship between bond yields and prices pushed the dollar to strong levels against the Japanese yen, which continues to weaken due to the significant interest rate gap between the U.S. and Japan.

The U.S. Dollar Index (DXY) rose by 0.5% during the day, confirming the dollar’s strength against other currencies, which directly impacted the USD/JPY pair. I believe this positive performance is a result of market expectations that the Federal Reserve will maintain its tight monetary policy for an extended period, especially as there are no clear signs of inflation slowing at the desired pace. Therefore, the outlook suggests continued dollar support unless new economic data shifts the landscape.

In my opinion, the Bank of Japan remains in a difficult position. Despite some indications of a possible adjustment to its monetary policy, the gap between U.S. and Japanese yields remains vast, making the yen less attractive to international investors. Given this reality, the continued rise in USD/JPY could increase the likelihood of Japanese authorities intervening in the forex market, especially if the pair surpasses critical levels such as 155.00. These levels typically trigger verbal intervention from Japanese officials, which could emerge soon, though its impact would likely be limited unless followed by concrete action.

With markets anticipating the U.S. Treasury bond auction and President Donald Trump’s trade policy stance, dollar volatility may persist. Investors will assess the strength of bond demand and its impact on yields, as any sudden decline in demand could push yields higher, further boosting USD/JPY gains. Meanwhile, growing discussions around stricter trade policies may support the dollar as a haven, adding further momentum to the current rally.

Given the current economic landscape, I believe the fundamental factors still support the dollar’s continued strength against the yen in the near term. However, risks remain, including potential Japanese intervention or a shift in U.S. rate expectations if inflation unexpectedly slows in the coming months. Based on this, the current outlook favours a continued upward trend for USD/JPY, while closely monitoring any developments that could reshape market direction.

The USD/JPY chart reflects a clear upward trend after breaking through the 200-day simple moving average (SMA) at 152.76, driving the pair to strong gains of over 1% on Wednesday. The bullish momentum continued until the pair reached 154.90, where it faced strong resistance, leading to some pullback and consolidation around the 154.50 range. This interaction between support and resistance levels suggests that the pair may need an additional catalyst to break through the recent highs and achieve further gains.