USD/JPY seeks cushion around 138.50 as US Dollar recovers, Tokyo inflation escalates

• USD/JPY has found a temporary cushion around 138.50 as the US Dollar recovers from morning losses.
• The 10-year US Treasury yields have dropped to 3.65% as Fed Powell is expected to shift to a lower rate hike.
• Tokyo’s inflation has outpaced forecasts led by months of yen weakness and elevated energy costs.

The USD/JPY pair is building a cushion around the immediate support of 138.50 in the early European session. Signs of recovery in the USD Index (DXY) have also propelled the USD/JPY pair marginally. The US Dollar has recovered its entire morning losses and is expected to frighten the solid risk-on profile ahead. However, the bias is still in favor of risk-sensitive assets.

S&P500 futures are behaving as inactive as investors are returning after a holiday session due to Thanksgiving Day. The returns generated by 10-year US Treasury bonds have dropped further to 3.65% as odds of continuation of 75 basis points (bps) rate hike by the Federal Reserve (Fed) in its December monetary policy meeting have vanished vigorously.

Investors would prefer to park their funds into the US government bonds if the Fed chose to slowdown its interest rate hike pace. Odds are favoring a deceleration in the extent of an interest rate hike as inflationary pressures have shown meaningful signs of exhaustion and financial risks need some care. Fed chair Jerome Powell is expected not to go extremely down and may shift to a 50 bps rate hike structure as the inflation rate is still far from the targeted rate of 2%.

On the Japanese yen front, the headline Consumer Price Index (CPI) in Tokyo has escalated to 3.8% vs. the consensus of 3.6%. While core CPI has jumped to 2.5% against the projections of 2.1%. As reported by Bloomberg, Tokyo’s inflation has outpaced forecasts to hit its fastest clip since 1982, an acceleration that suggests nationwide price growth will also quicken in November after months of yen weakness and elevated energy costs.