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USD/JPY Drops After Soft US CPI Data

USD/JPY tumbled on Tuesday after the release of softer-than-expected consumer inflation data in the US. This was the latest twist in the ongoing battle between the Federal Reserve and inflation, which currently stands at more than three times the Fed's 2% target.

The latest figure for US Consumer Price Index dropped to 7.1% year-on-year in November, from 7.7% seen in October, and below the consensus forecast of 7.3%. Core CPI, which strips away volatile items such as energy, food, and alcohol, also fell to 6.0% from 6.3%, below the consensus of 6.1%.

The market reaction was as expected – equities jumped, while the US dollar slid, as investors speculated that the Fed could see this as justification to take a dovish pivot. These thoughts have only been strengthened as the Federal Open Market Committee (FOMC) winds up its policy meeting on Wednesday. Although most analysts are expecting a 50 basis point hike, there is a strong chance that the Fed will pause after the 25bp hike and the rate tightening cycle will detain at 4.75% – below the 5.00%-level or higher seen in many forecasts.

However, investors should remain cautious. Inflation may have fallen in recent months, but it remains well above the Fed’s target. Jerome Powell and Co. may continue to drum out a hawkish message, but the market will be looking out for signs that suggest they may be willing to slow down their rate hikes.

On the technical front, USD/JPY broke below key support at 136.20 earlier in the session. There is further support at 135.43, while resistance can be found at 137.34.