- USD/JPY stays below 145.00 with US core PCE inflation on the horizon.
- Global market sentiment appears to be asset-specific.
- The BoJ is expected to raise interest rates again this year.
The USD/JPY pair trades sideways below the crucial resistance of 145.00 in Thursday’s European session. The asset struggles for direction as investors await the United States (US) Personal Consumption Expenditure inflation (PCE) report for July, which will be published on Friday.
Global market action appears to be asset-specific as risk-sensitive currencies have faced sharp selling pressure, while S&P 500 futures have posted significant gains in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its recovery above 101.20.
The US PCE inflation is expected to drive the next move in the US Dollar (USD) as it would influence market speculation for the Federal Reserve’s (Fed) September policy meeting. According to the CME FedWatch tool, the Fed is certain to pivot to policy-normalization in September but traders remain split over the likely size of interest rate cuts. 30-day Federal Funds Futures pricing tool shows that the likelihood of a 50 basis points (bps) interest rate reduction is 34.5%, while the rest favors a 25 bps.
In today’s session, investors await revised estimates for Q2 Gross Domestic Product (GDP) and Initial Jobless Claims data for the week ending August 23. Investors will keenly watch the jobless claims data as the Fed is now more concerned about deteriorating labor market strength.
On the Japan front, firm expectations of more interest rate hikes by the Bank of Japan (BoJ) continue to support the Japanese Yen (JPY). On Wednesday, BoJ Deputy Governor Ryozo Himino said, "There is no change to our stance that we would adjust monetary easing if economic activity and prices are likely to meet projections."
Meanwhile, investors await the Tokyo Consumer Price Index (CPI) data for August, which will be published on Friday. The inflation report is expected to show that the CPI, excluding Fresh Food, grew steadily by 2.2%.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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