USD/JPY Stays Afloat Despite Soft US Data
The USD/JPY pair has shown resilience in the face of softer US data and falling Fed hike bets, failing to deliver on downside catalysts last week.
Despite a disappointing payrolls report, softer-than-expected CPI and PPI inflation reports, and a decline in US retail sales, the pair barely responded to these events. Citi's Economic Surprise Index has rolled over sharply following the run of undershoots, indicating data beats are becoming increasingly rare.
Market pricing for Fed rate hikes looking out to the middle of next year has also declined, with the futures curve now pricing around one and a half hikes instead of two and a half. This is evident in Citi's Economic Surprise Index, which has rolled over sharply following the run of undershoots.
The direction of travel is obvious, making it difficult to make the case for raising rates in the current environment. The Bank of Japan may lift rates sooner than markets currently have priced, with spreads between US and Japanese 2-year and 10-year yields continuing to compress.