USD/JPY climbs to three-week high as Yen shrugs off hot CPI, Fed signals steady policy path

• Japanese Yen weakens further despite stronger domestic inflation prints.
• USD/JPY trades near 146.00, set for a weekly gain of around 1.20%.
• Fed's Monetary Policy Report maintains cautious tone, eyeing gradual easing.
• BoJ Governor Ueda says more rate hikes likely if economy stays on track for 2% inflation target.

The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) on Friday, extending its losing streak despite a subdued Greenback and shrugging off hotter-than-expected inflation figures that highlight persistent price pressures in Japan.

The USD/JPY pair is up around 0.35% on the day, trading near the 146.00 mark and testing a fresh three-week high at the time of writing. With Friday's advance, the pair is on track to notch a weekly gain of roughly 1.20%, underpinned by steady US Treasury yields.

Notably, the yield on the benchmark 10-year US Treasury note climbed to 4.43% on Friday, lending the US Dollar a slight edge over the Yen despite the Greenback's generally subdued tone elsewhere.

Meanwhile, fresh US data offered a mixed signal for the US Dollar. The Philadelphia Fed Manufacturing Index remained stuck at -4.0 in June, matching May's figure and falling short of forecasts for a modest improvement. This stagnant reading signals that manufacturing activity in the region continues to struggle, weighed down by tepid demand and early signs of cooling in the labor market. Worryingly, the survey's employment index slipped back into negative territory for the first time since May 2020, pointing to a renewed contraction in factory jobs.

Today's Federal Reserve (Fed) Monetary Policy Report painted a complex picture of a US economy navigating persistent inflation and the economic drag from tariffs. Officials noted that while inflation remains elevated and the labor market sturdy, the full impact of recent import duties has yet to emerge--a factor that clouds their outlook. Policymakers reaffirmed their commitment to a data-driven approach, leaving rates unchanged for now but keeping the door open for a couple of rate cuts later this year if conditions allow.

Overall, the Fed's tone reinforces market expectations that any policy easing will be gradual, helping to keep US yields supported and the US Dollar relatively resilient against lower-yielding peers like the Yen.

Japan's latest CPI data adds fuel to the debate over the Bank of Japan's (BoJ) next move. Fresh data showed that Japan's National Consumer Price Index (CPI) rose by 3.5% YoY in May, easing slightly from April's 3.6%. Notably, the Core CPI--which strips out volatile fresh food prices--climbed 3.7% on an annual basis, surpassing market forecasts and marking its fastest pace since January 2023.

Reflecting on the outlook, Bank of Japan Governor Kazuo Ueda said on Friday that the central bank will continue to raise interest rates if improvements in the economy keep Japan on track to durably achieve its 2% inflation target. He acknowledged that "underlying inflation may stagnate due to a slowdown in economic growth, but [is] likely to accelerate thereafter as intensifying labour shortages heighten medium- to long-term inflation expectations." His remarks reinforce the view that while the BoJ remains committed to policy normalisation, it will move cautiously.