USD/JPY Volatility Peaks Ahead of Crucial US Inflation Data
The US employment report on Friday delivered a significant downside surprise, scaling back expectations of a September rate hike to around 44%, from above 55% ahead of the release. The data had a minimal impact on the USD/JPY forecast, with the pair recovering towards levels seen before the payrolls release and trading close to 159.00.
The next major catalyst is US inflation, with CPI due later this week. Developments in oil markets also remain important, particularly as uncertainty surrounding the Strait of Hormuz continues to complicate the inflation outlook. Oil prices are finding support from the uncertainty, although a prolonged disruption to energy flows could keep inflationary pressures elevated and make it harder for the Fed to ease policy.
The Federal Reserve's data-dependent approach puts CPI in the spotlight. The latest market reaction reinforces just how important incoming economic data have become for the dollar. Markets are being forced to assess individual data releases through the Fed's evolving reaction function, with US inflation particularly important due to Chairman Kevin Warsh's admission that the Fed has consistently gotten it wrong and is looking to address it.