USDJPY erases post-US PPI losses, rebounds from two-month lows

• US data: PPI below market consensus while Empire Index soars.
• US Dollar tumbles after economic reports and then reverses.
• USDJPY recovers all PPI losses, after a bounce of more than 150 pips.

The USDJPY pair recovered more than 150 pips during the last hours, rising back to the 139.50 area. Previously the pair reached fresh two-month lows at 137.62, following the US PPI report.

Inflation down, activity up

The Producer Price Index (PPI) rose 8% from a year earlier in October, below the 8.3% of market consensus and down from the 8.4% of September. It was the lowest reading since mid-2021. The numbers contribute to increasing expectations that the Federal Reserve might slow down its rate hikes. The Empire Manufacturing Index soared in November from -9.1 to 4.5 surpassing expectations.

Federal Reserve Bank of Philadelphia President Patrick Harker said on Tuesday that he is not overly worried about inflation expectations. "As long as we're moving consistently to collapse inflation down, we can pause."

On Asian hours, Japan reported that GDP contracted unexpectedly by 0.3% during the third quarter. It was the first negative reading since the third quarter of 2021. “Weakness in inventories and net exports were the main drivers.  In a nutshell, this is why policymakers are worried about removing stimulus too soon.  To us, this is a green light to buy USD/JPY.  Next BOJ meeting is December 19-20 and another dovish hold is expected”, said analysts at Brown Brothers Harriman.

Dollar down then up

The US Dollar reacted as expected initially after the PPI with a sharp decline to fresh lows across the board. But it then reversed sharply, rising above the level it had before the PPI, even as US yields remain down for the day and amid higher equity prices.

The USDJPY is hovering above 139.00, still with a negative bias in the short-term but far from the lows. A slide below 138.50 would increase the bearish pressure, while above 139.60, the US Dollar could gain strength for a test of the daily high at 140.60.

Technical levels