As expectations that pricing for a December rate hike will exceed 80% strengthen depending on the US October CPI results, USD/JPY is trading in the upper ¥157 range. We examine the 3 factors that will drive the market and the scenarios for tonight.
In recent markets, the probability that the Federal Reserve will decide on a rate hike at the 8–9 December FOMC has surged to around 82%–84%, with a more hawkish trend driven by resilient employment, a renewed acceleration in short-term inflation expectations and rising US Treasury yields. These factors are said to be supporting expectations of an additional rate hike in December.
USD/JPY typically comes under stronger upward pressure when rate hike pricing rises, but it is currently struggling to move higher around the upper ¥157 range to ¥158. Factors cited as contributing to this include easing inflation concerns following the sharp decline in crude oil prices, position adjustments and changes in policy expectations following the midterm elections.
Ahead of the release of the US October CPI tonight, market reactions are expected to diverge depending on the results. Three scenarios are presented: an upside surprise, a result in line with market expectations and a downside surprise, together with the expected ranges and the responses of US interest rates and foreign exchange.