Japanese Yen weakens toward 160 as US inflation bolsters Fed hike bets

• USD/JPY hits a two-month low 2 as stronger-than-expected US inflation and hawkish Fed remarks lift the US Dollar.
• Markets fully price in a December Fed rate hike, with an 11.5% chance of a half-point move.
• The wide US–Japan interest rate gap weighs on the Japanese Yen, but the risk of another intervention keeps traders cautious.

USD/JPY edges higher on Wednesday, extending gains for the second straight day as expectations of a more hawkish Federal Reserve (Fed) outlook renew bullish momentum in the US Dollar (USD). At the time of writing, the pair trades around 159.13, up 0.24% on the day, its highest level since September 2.

Stronger-than-expected US consumer inflation data released on Tuesday, along with calls from Fed officials for further monetary policy tightening, have strengthened the Greenback. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 102.50, approaching the year-to-date high of 102.94 reached in October.

The US Consumer Price Index (CPI) rose 0.4% MoM in October, above the 0.3% forecast but down from 0.6% in September. Core CPI, which excludes food and energy, rose 0.3%, matching September’s pace and beating the 0.2% forecast.

Fed Governor Christopher Waller said a half-point rate hike may be needed in December if October core CPI comes in “around 0.3% or higher.” Other officials, including Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson, also backed further monetary tightening, while Fed Vice Chair for Supervision Michelle Bowman stressed the need to bring inflation under control.

Markets now fully price in a rate hike in December, with an 88.5% chance of a 25-basis-point (bps) increase and an 11.5% chance of a 50 bps move, according to the CME FedWatch Tool. Traders also expect more rate hikes next year, with three additional quarter-point increases priced in by mid-2027.

Meanwhile, the Japanese Yen (JPY) struggles as interest rates in Japan remain well below those in the US, with the Bank of Japan’s (BoJ) policy rate at 1.25%, compared with the Fed’s 3.75%-4.00% range. Although the BoJ remains on a gradual rate-hiking path, this offers limited support to the Yen, as prospects of further Fed tightening could keep the interest rate gap between the two countries wide.

Nevertheless, the risk of another currency intervention keeps traders cautious as USD/JPY approaches the 160 mark. Japan has already stepped into the market several times this year to support the Yen, including a record ¥7.98 trillion intervention on July 30. Finance Minister Satsuki Katayama warned earlier this month that authorities would act against disorderly or excessively speculative currency movements.