USD/JPY slides below 145.00 amid weakness in US Dollar

USD/JPY falls below 145.00 as the US Dollar remains on the backfoot.
Traders remain divided over the likely size of the Fed’s September interest rate cuts.
Investors doubt how much inflation in Japan will pick up this year.

The USD/JPY pair falls to near 144.70 in Tuesday’s European session. The asset drops as the US Dollar (USD) remains on the backfoot as market participants appear to be certain that the Federal Reserve (Fed) will start reducing interest rates from the September meeting. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, exhibits a subdued performance below 101.00.

Investors’ risk-appetite has diminished as tensions between Iran and Israel in the Middle East have escalated. S&P 500 futures surrender gains posted in Asian trading hours. While the broader market sentiment remains cheerful amid confidence that the Fed will pivot to policy-normalization in September.

Though the Fed seems certain to cut interest rates in September, traders remain split over the likely size of rate cuts, given that United States (US) recession fears have eased significantly. The CME FedWatch tool shows that the likelihood of a 50-basis point (bps) interest rate reduction is 28.5%.

For fresh interest rate guidance, investors await the US core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. The annual core PCE is estimated to have grown at a higher pace of 2.7% from 2.6% in June, with monthly figures growing steadily by 0.2%. Signs of price pressures remaining persistent would weigh on expectations of bigger interest rate cuts.

Meanwhile, the Japanese Yen (JPY) outweighs the US Dollar on the latter’s weakness but is underperforming against its other peers. Easing signs of price pressures in Japan remaining sticky have raised doubts over the scope of Bank of Japan’s policy tightening. Japan’s Corporate Service Price Index, a key measure of producer inflation, came in lower at 2.8% in July than estimates of 2.9% and June’s reading of 3%. However, BoJ Governor Kazuo Ueda said last week that there is a need to raise interest rates further.

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 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.

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

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.

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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