USD/JPY recovers intraday losses as US Dollar strives to rise further

USD/JPY pares intraday losses and recovers above 148.00 amid firm US Dollar.
Investors shift their focus to the US inflation data for September.
A decline in Japan’s Overall Household Spending would diminish BoJ’s rate hike bets.

The USD/JPY recovers its intraday losses and returns to the day’s high of 148.20 in Tuesday’s North American session. The major gains as the US Dollar (USD) strives to extend its upside. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near a seven-week high of 102.50.

The US Dollar’s performance has remained firm as market expectations for the Federal Reserve (Fed) to deliver another larger-than-usual interest rate cut of 50 basis points (bps) in November have waned.

According to the CME FedWatch tool, traders have repriced the Federal Fund rate for November and see a 25-bps rate cut that will push interest rates lower to 4.50%-4.75% after the release of the Nonfarm Payrolls (NFP) report for September. The employment data showed that the labor demand remained robust, the Unemployment Rate decelerated and the wage growth remained strong.

Going forward, investors will pay close attention to the US Consumer Price Index (CPI) data for September, which will be published on Thursday. Economists expect the core CPI – which excludes volatile food and energy prices – to have grown steadily by 3.2%. Annual headline inflation is expected to have decelerated further to 2.3% from 2.5% in August.

The impact of inflation is expected to be slight on Fed rate cut expectations as officials are more focused on reviving consumer spending and job growth.

On the Tokyo front, Overall household spending declined by 1.9% in August, slower than expectations of a 2.6% contraction. In July, the consumer spending measure grew by merely 0.1%. This is expected to diminish expectations of more rate hikes by the Bank of Japan (BoJ) in the last quarter of the year.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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 BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, 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 supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact 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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