USD/JPY rose after the release of the US inflation report in the United States (US) and cemented the case for a Federal Reserve (Fed) pause on its tightening cycle after increasing rates by 500 basis points since March 2022. At the time of writing, USD/JPY trades at 139.90, shy of challenging the 140.00 mark.

Cooling inflation strengthens the case for Fed pause; US Dollar Index at three-week lows.

Inflation in the US flashed signs of cooling down in the headline figure, but the core remains stickier. The US Department of Labor revealed the Consumer Price Index (CPI) in May rose by 4% YoY, beneath estimates and less than April’s 4.9%. CPI has printed a lower reading than the previous month for twelve straight months, strengthening the case for a Fed pause.

Nevertheless,  core CPI, which excludes volatile items like food and energy, increased to 5.3% YoY, aligned with estimates, but 0.2% below the prior’s month data. Money market futures speculate that Jerome Powell and Co. would increase rates at the July meeting by 25 basis points (bps) to 5.25%-5.50%, as shown by the CME FedWatch Tool, with chances at 58.2%, higher than a week ago.

Following the data release, the USD/JPY seesawed around the 139.00-140.00 area before stabilizing around current exchange rates. Meanwhile, post the US CPI release, US Treasury bond yields are rising, with the 10-year note yielding 3.790%, gaining five basis points (bps), a tailwind for the USD/JPY.

The US Dollar Index (DXY), a measure that tracks the buck’s value against a basket of six currencies, drops 0.34%, exchanges hands at 103.201, its lowest level since May 23, at three-week lows