The USD/JPY exchange rate rose to a one-week high after data showed that U.S. inflation in January exceeded forecasts—an indicator that increases the likelihood of the Federal Reserve (Fed) maintaining higher interest rates for longer to control rising prices.
A report from the U.S. Department of Labor revealed that consumer prices in January saw the largest increase in nearly a year and a half. The headline Consumer Price Index (CPI) rose 0.5% from the previous month, while core CPI increased by 0.4%. Both figures exceeded economists’ expectations of a 0.3% rise.
On a year-over-year basis, the January CPI rose 3%, and core CPI climbed 3.3%, surpassing the projected increases of 3.3% and 3.1%, respectively.
“The key takeaway here is that regardless of why CPI is accelerating, the Fed has made it clear that they won’t cut interest rates until inflation is closer to 2%,” said Adam Button, chief analyst at ForexLive, in an interview with Reuters. “The chances of achieving the 2% inflation target this year have significantly diminished, as CPI rose by 0.5% in just the first month of the year.”
Before the CPI report was released, futures market traders expected the Fed to cut interest rates by a total of 0.37 percentage points this year. However, after the data was published, expectations for the total rate cut in 2025 dropped to 0.27 percentage points. This suggests a higher likelihood that the Fed will only implement a single 0.25 percentage point rate cut this year.
The probability of a 0.25 percentage point rate cut at the Fed’s June meeting has now dropped to just over 30%, down from more than 50% the previous day, according to data from the CME’s FedWatch Tool. As for the Fed’s meetings in March and May, the market generally believes interest rates will remain unchanged.
On February 12, during the New York trading session, the USD surged nearly 1.3% against the Japanese yen, reaching 154.44 yen per USD, the highest level in a week.
The yen is highly sensitive to the interest rate differential between the Fed and the Bank of Japan (BOJ). Earlier this month, the yen strengthened significantly due to signals of continued rate hikes in the BOJ’s March meeting. However, as expectations of the Fed keeping rates higher for longer increased, the USD quickly regained its advantage against the yen.
As of the morning of February 13, the yen remained on the defensive, trading at 154.3 yen per USD.
The Dollar Index, which measures the strength of the USD against a basket of six major currencies, reached a one-week high of 108.52 points during Wednesday’s session. However, this gain was not sustained, with the index closing at 107.95 points, only slightly up from the previous session.
This morning, the Dollar Index reversed course, dropping nearly 0.2% at one point, trading above 107.7 points. The decline was attributed to profit-taking by traders and speculation about whether the January CPI report was just a temporary anomaly rather than an indication of a longer-term inflation trend.
“January is a highly unpredictable month as prices for many goods rise for various reasons, sometimes sharply. We don’t believe January’s inflation acceleration will necessarily repeat next month,” said Thomas Simons, chief economist at Jefferies.
During his second congressional testimony, held at the House Financial Services Committee on Wednesday, Fed Chair Jerome Powell stated that the latest CPI data serves as a reminder that the Fed has made “significant progress” in bringing inflation closer to the 2% target but “has not quite reached it yet.”
“We want to keep policy restrictive for now,” Powell said. Previously, during his Senate Banking Committee testimony on Tuesday, Powell stated that the Fed was in no rush to cut interest rates.
Currency traders are also closely watching the tariff policies of the Trump administration. After imposing a 10% tariff on Chinese goods and a 25% tariff on steel and aluminum, Trump is now considering reciprocal tariffs on all countries.
Many experts believe that aggressive import tariffs could increase inflationary pressure in the U.S., making it even more challenging for the Fed to lower interest rates.
“Potential tariffs are increasing inflation risks in the coming quarters. However, there are also some positive signs—housing prices may decline significantly this year, leaving the door open for the Fed to cut rates in the second half of the year,” said James Knightley, chief economist at ING.
