USD/JPY Cracks Two-Day Advance Despite Optimistic Rates, Hawkish Fed Comments

Following a two-day winning streak, USD/JPY returns to the bears' radar early on Wednesday as market participants analyze the hawkish Fed verdict relative to expectations of the Bank of Japan's (BoJ) next move. Consequently, the Yen pair re-establishes its intraday bottom near 132.70 while posting its first daily loss in three days, down 0.20% as of press time.

The Japanese government’s nomination of a hawkish leader for the Bank of Japan (BoJ) board appears to have challenged USD/JPY bearish of late, despite the run-up in the US Treasury bond yields and the US Dollar’s comeback following the US inflation data.

On Tuesday, the Japanese government officially nominated Kazuo Ueda as the BoJ Governor. Notably, Bloomberg published an article claiming that the Bank of Japan's cheap money policy could be challenged due to Ueda's hawkish inclination.

Aside from the United States, the majority of Federal Reserve (Fed) policymakers were in support of additional rate hikes despite the fact that inflation did not meet "positive surprise" expectations. The same factor drove yields on US Treasury bonds and the US Dollar.

US Consumer Price Index (CPI) surged over market expectations to 6.4% YoY but registered the slowest gain since 2021 while slipping below 6.5% before. Importantly, the CPI excluding food and energy, also known as the Core CPI, increased by 5.6% year-over-year compared to market expectations of 5.5% and previous readings of 5.7%.

Following the release of the statistics, Lorie Logan, president of the Dallas Fed, indicated that they must be prepared to continue rate hikes for a longer period than originally anticipated. John Williams, president of the Federal Reserve Bank of New York, echoed this sentiment, stating that the job to contain excessive inflation is not yet complete. Additionally, Philadelphia Fed President Patrick Harker hinted that they are not done (with lifting rates), but they are certainly near.

US 10-year Treasury bond rates oscillate around 3.75%, after climbing three basis points (bps) to re-establish a six-week high, while the two-year counterpart spiked to its highest level since early November 2022 by touching 4.62%, at the latest.

In spite of this, S&P 500 Futures track Wall Street's negative closing to emphasize the somewhat pessimistic attitude and weigh on the USD/JPY exchange rate, primarily due to the Japanese Yen's (JPY) traditional risk-aversion appeal.

A dearth of significant data/events from Japan leaves the USD/JPY pair dependent on US catalysts for clear direction. Among them, the January Retail Sales and Industrial Production data as well as the February NY Empire State Manufacturing Index should be attentively monitored.