USD/JPY Fundamental Daily Forecast – Edging Higher as Traders Bet Fed Will Keep Peak Rates for Longer

The Dollar/Yen is edging higher on Monday as investors braced for the possibility of higher-than-expected U.S. consumer inflation (CPI) data. Expectations that the Federal Reserve will keep rates at their peak throughout 2023 is another factor boosting the Forex pair.

Furthermore, with Fed dashing hopes for rate cuts in the second half of next year, a recession now appears to be very likely.

At 06:36 GMT, the USD/JPY is trading 137.036, up 0.444 or +0.33%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.25, unchanged.

US Consumer Inflation Expected to Dip

A consensus of analysts see month over month consumer inflation (CPI) dipping to 0.3% from 0.4%. The annual rate is expected to have weakened from 7.7% to 7.3%.

The monthly Core CPI is expected to have risen 0.3%, matching last week’s increase. Economists expect U.S. core inflation to ease to 6.1% in November from a year ago, compared with a rise of 6.3% the previous month.

Fed to Raise Benchmark 50 Basis Points, Peaking Near 5%

Policymakers are expected to raise rates by 50 bps on Wednesday, following four consecutive 75 basis-point hikes, and by quarter points at the following two meetings.

The Federal Open Market Committee’s (FOMC) median projection is expected to show the policy benchmark peaking at 4.9% in 2023 – reflecting a 4.75% – 5% target range – compared to 4.6% seen in September. That would be a hawkish surprise to investors.

Fed Projections Expected to Predict Weakness

The Fed’s summary of economic projections are likely to show that policy makers are looking for weaker US growth and slightly higher unemployment than they were expecting in September. They may downgrade 2023 growth estimates to 0.8% compared to 1.2% in September while seeing unemployment rising to 4.6%. The U.S. jobless rate stood at 3.7% last month, according to a Bloomberg survey.

Short-Term Outlook

The price action suggests USD/JPY traders aren’t sure what the Fed is going to deliver. However, the pattern is similar to the one in late October shortly before the Fed’s last rate hike on Nov. 2.

The day before the Fed announcement in November the USD/JPY was trading 148.235. It’s currently at 137.036. The steep drop was fueled by clarity from the Fed and economic data. Traders were confident the Fed would begin slowing the pace of rate hikes.

However, recent economic data including hotter-than-expected labor market, services, factory and producer inflation data have casts doubts over when the Fed will stop raising rates and at what level.

That being said, bearish traders don’t want to see higher-than-expected inflation because this will indicate interest rates may have to stay higher for longer.