USDJPY drops to near 146.00 ahead of US Inflation data

• USDJPY has slipped sharply to near 146.20 despite overall pessimism in the market.
• The alpha generated on US government bonds tumbled on expectations of a slowdown in Fed’s rate hike pace.
• The headline and core US CPI are seen lower at 8.0% and 6.5% respectively.

The USDJPY pair slipped to near 146.20 in the early Tokyo session after facing barricades around the critical hurdle of 146.80. The asset has turned volatile ahead of the US Consumer Price Index (CPI) event. The risk profile has turned mildly supportive for the risk-perceived currencies as S&P500 futures have displayed a marginal recovery after a vertical decline on Thursday.

The headwinds of volatility ahead of the US mid-term elections outcome and October’s inflation report, and warning signs from Federal Reserve (Fed) policymaker on US economic prospects forced investors to dump US equities. Also, a massive lay-off plan by Facebook now Meta hurt investors’ sentiment.

Richmond Fed President Thomas Barkin on Wednesday cited that Fed’s fight against inflation may lead to a downturn in the US economy but that is a risk that the Fed will have to take, reported Reuters.

While the US dollar index (DXY) capitalized on anxiety among investors and displayed a smart recovery after printing a seven-week low at 109.35 and moving firmly to near 110.50.

The 10-year US Treasury yields have dropped to 4.09% as odds of a slowdown in the pace of rate hikes by the Fed are escalating. As per the CME FedWatch tool, the odds of a 75 basis point (bps) rate hike for December monetary policy have trimmed dramatically to 38.5%.

On the Tokyo front, the Japanese government is announcing economic stimulus packages to support the economy. This week, the administration confirmed a second budget worth 29.1 trillion Japanese Yen after a budget of $198 Billion to spurt the aggregate demand.

Going forward, the major trigger will be the US CPI data. The headline CPI is seen lower at 8.0% against the former release of 8.2%. While the core inflation that doesn’t inculcate oil and food prices is seen at 6.5%.