USD/JPY sticks close to 113.50 mark as long-term US yields remain subdued

• USD/JPY continues to trade close to the 113.50 level after seeing some post-US inflation data choppiness.
• The pair continues to track moves in the US 10-year yield and as long as that remains subdued, USD/JPY will struggle to recover.

USD/JPY was subdued on Friday, for the most part sticking within recent ranges and not deviating too far from the 113.50 area, which, alongside the 50-day moving average (currently at 113.60), has acted as something of a magnet to the price action these last few days. On the day, the pair is flat just under 113.50, having seen some choppiness after the release of US inflation data which confirmed the headline rate of CPI rising to a four-decade high at 6.8%, though judging by the market reaction, mny had been expecting higher.

The pair is on course to end the week around 0.6% higher and, indeed, Omicron uncertainty that had weighed on the pair and pushed back from recent peaks above 115.00 has faded somewhat this week. Market participants are now more comfortable in the knowledge that 1) the new variant is milder than delta and 2) the Fed is intent on pressing ahead with accelerating the removal of monetary stimulus as high inflation threatens labour market progress (according to them) and as the Omicron variant threatens exacerbating inflationary pressures further.

Whilst these notions are offering some support to risk appetite and the dollar against other G10 currencies, long-term US yields remain subdued and this is preventing USD/JPY from pushing on. With the US 10-year still under 1.50%, there are clearly significant worries that the ongoing presence of the pandemic will weaken long-term growth prospects, as might a faster pace of Fed monetary stimulus removal, thus meaning that in the long-run, the Fed has to stay comparatively more accommodative.

For USD/JPY to advance back towards recent highs around 115.00, some confidence in the long-term outlook for the US economy is going to have to come back. With Covid-19 cases in the US already on the rise into winter (following in the footsteps of Europe) prior to the emergence of Omicron, expect this trend to further accelerate in the coming months. That means lockdown-light could be coming back to some of the more pro-lockdown states, weighing on activity. This could underpin the yen versus the dollar in the near term, even in the face of a hawkish Fed pivot.