USDJPY rises 1.0% to offset US inflation-driven fall above 142.00; US Michigan CSI expected

During the Asian session on Friday, USDJPY bounces at the intraday high near 142.50 as it consolidates the worst daily decline since October 1998. In doing so, the yen pair takes signals from the market's slightly bearish sentiment and the lack of movement in US Treasury yields during the day.

Nonetheless, fears of coronavirus return as Beijing, China reports the highest daily spike in covid infections in over a year. For the first time in seven months, the number of daily coronavirus cases exceeded 10,000 at the national level. Aside from this, 10-year US Treasury rates remain quiet near the monthly low near 3.81%, which was flashed on Thursday after the sharpest decrease since the start of December 2021.

Bond market inaction may be related to U.S. and Canadian bank holidays, as well as the market's demand for greater confirmation of the Federal Reserve's decision to suspend rate hikes (Fed).

It should be highlighted that increased fears of Japan's involvement in the currency market to defend the yen, the Bank of Japan's (BOJ) defense of the cheap money policy, and optimism for an economic recovery in the next years all contribute to the USDJPY resurgence.

Thursday, the US Consumer Price Index (CPI) for October surprised markets by slipping to 7.7% YoY, the lowest level since March of last year, compared to forecasts of 8.0% and a previous reading of 8.2%. Importantly, the Core CPI fell to 6.3% from 6.5% and earlier readings of 6.6%.

The president of the Dallas Federal Reserve, Lorie Logan, indicated that the October CPI inflation report is a welcome respite and that it may soon be time to slow the rate of rate hikes. Patrick Harker, president of the Federal Reserve Bank of Philadelphia, told Reuters on Thursday that the US Federal Reserve may slow its rate hikes in the coming months. Esther George, president of the Federal Reserve Bank of Kansas City, Loretta Mester, president of the Federal Reserve Bank of Cleveland, and Mary Daly, president of the Federal Reserve Bank of San Francisco, have all recently advocated for moderate rate hikes at upcoming meetings.

As a result, the CME's FedWatch Tool shows an 80% chance of a 50 basis point (bps) rate hike in December, up from about 55% shortly after the Fed's meeting last week.

Given recent forecasts for an easy Fed rate hike in December and the BOJ's preference for dovish monetary policies, the USDJPY pair is likely to continue falling. The initial readings of the US Michigan Consumer Sentiment Index (CSI) for November, which is expected to be 59.5 compared to 59.9 in October, will precede the meeting between US President Joe Biden and Japan's Prime Minister (PM) Fumio Kishida on Sunday in order to provide clear direction.

Due to the oversold RSI conditions, USDJPY bears are challenged by an ascending support line from early March and the 100-day moving average (DMA) in the vicinity of 141.00-140.85. The comeback must surpass the late-October swing low of 145.10 to impress buyers.