USD/JPY stabilises in low 125.00s as traders weigh Fed commentary, US inflation data and bond yields reaction

• USD/JPY has stabilised in the low 125.00s in recent hours as traders digest Fed commentary and the day’s US CPI.
• The pair is flat, having pulled back from earlier levels above 125.50 after US yields fell.

USD/JPY has stabilised in the low 125.00s in recent trade and currently trades unchanged on the day, having slipped back from earlier high to the north of 125.50 in tandem with a pullback in US yields following US inflation data. Though the annual pace of headline Consumer Price Inflation hit a four-decade high at 8.5%, a tad above expected, core measures (particularly the MoM) missed expectations, resulting in the market paring back on some Fed tightening bets.

But the most recent batch of comments from Fed Vice Chair Lael Brainard suggests that, while the Fed is relieved to see some early signs of a slowdown in core inflation, the bank remains committed to normalising policy quickly. Brainard talked about deciding on a balance sheet reduction plan in May for runoff to then start in June, and noted that normalising policy to a significant degree by the end of the year remains the appropriate policy path.

Brainard's remarks have helped the dollar recover its poise in recent trade and the DXY recover back to multi-month highs in the 100.30 region. US yields are yet to recover back to pre-US CPI data levels, with the US 10-year still down about 8bps on the day just above 2.70%, hence why USD/JPY has been unable to recover back above 125.50.

But the USD/JPY bulls will likely remain highly confident. Further Fed speak throughout the rest of this week will likely reinforce Brainard’s message that the bank will press ahead with tightening plans. Meanwhile, US Producer Price Inflation data out on Wednesday may yet offer an upside surprise. Risks thus remain tilted towards the upside for the pair.