USD/JPY Drops as Japanese Inflation Cools and U.S. Fiscal Risk Weakens Dollar
USD/JPY fell to multi-week lows after Japanese inflation cooled and U.S. fiscal uncertainty increased. Japan’s October core CPI (ex-fresh food) slowed to 2.1% YoY from 2.3%, while core-core CPI eased to 1.9%, driven by utility subsidies, fading base effects and a stronger yen. These data reduced expectations for near-term Bank of Japan tightening, narrowing the yield gap with U.S. Treasuries. At the same time, political deadlock in the U.S. Congress over appropriations, the debt ceiling and tax expirations has raised concerns about government funding and fiscal stability, undercutting dollar safe-haven flows. Traders are watching technical levels: immediate support near 147.50 (a break could target 146.00) and resistance at 149.00–150.00. Market implications include higher FX volatility, pressure on exporter earnings in Japan if the yen remains strong, and narrower JGB–Treasury yields. Key near-term catalysts: the BoJ policy meeting and U.S. budget negotiations. For traders: monitor CPI and wage prints in Japan, U.S. fiscal headlines, 10-year JGB/Treasury spreads, and USD/JPY technical breaks for potential directional trades.
Bearish
The news points to a bearish outcome for USD/JPY and risk for dollar strength. Cooling Japanese inflation lowers the immediate need for further BoJ tightening, narrowing the Japan–U.S. yield differential that has supported the dollar. Concurrent U.S. fiscal gridlock increases political risk and reduces demand for dollar-denominated safe-haven assets. Historically, episodes of U.S. fiscal uncertainty (e.g., 2011 debt ceiling tensions, 2013 shutdown) caused dollar weakness and FX volatility until political resolution. In the short term, expect increased volatility and possible continuation lower if 147.50 breaks, driven by macro headlines and automated selling. In the medium term, outcomes hinge on the BoJ’s reaction to wage trends and whether U.S. fiscal negotiations stabilize; resolution or stronger U.S. yields could reverse losses, but persistent fiscal risk and lower-than-expected Japanese inflation could sustain downside pressure. Traders should watch CPI/wage prints, BoJ guidance, U.S. budget progress, and 10-year yield spreads to time entries and manage risk.