USD/JPY holds above YTD low as US inflation takes center stage

VaselineSeptember 10, 2024

0 2 minutes read

USD/JPY holds above YTD low as US inflation takes center stage

USD/JPY is trading sideways near 143.00 with focus on August US inflation data.
US inflation data will influence market expectations for the Fed’s rate cut path.
Investors see the BoJ raising interest rates further in the rest of the year.

The USD/JPY pair is holding near 143.00 in the European session on Tuesday, holding on to gains generated after rebounding from a yearly (YTD) low of 141.70 months. The asset is expected to trade sideways as investors shrugged off US (US) August Consumer Price Index (CPI) data due on Wednesday.

Market sentiment appears to be cautious as US inflation data is expected to significantly influence market speculation for the Federal Reserve’s (Fed) rate cut path. S&P 500 futures posted nominal losses in European trading hours. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is clinging to gains near 101.60.

Investors see annual US CPI falling to 2.6%, the lowest since March 2021, from 2.9% in July. Core inflation – which excludes volatile food and energy prices – is expected to have risen steadily at 3.2%. The significance of inflation data increased as US non-farm payrolls (NFP) data for August failed to make a clear case for whether the Fed will begin its policy easing cycle aggressively or gradually.

The weak inflation numbers would drive market expectations for the Fed to cut interest rates by 50 basis points (bps) at next week’s monetary policy meeting. Confusion over the likely size of the Fed’s rate cut would deepen if numbers remain hot or sticky.

Meanwhile, the overall outlook for the Japanese yen (JPY) remains firm as the Bank of Japan (BoJ) is expected to further tighten monetary policy amid persistent inflationary pressures. Traders continue to bet on BoJ policy tightening despite Japan’s Q2 Gross Domestic Product (GDP) data coming in lower than forecast. Japan’s annualized GDP unexpectedly grew at a slower pace of 2.9%. Investors expected Japan’s economy to expand at a faster pace of 3.2 percent from the previous release of 3.1 percent.

Frequently Asked Questions about the Japanese Yen

The Japanese yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by Bank of Japan policy, the difference 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 intervened directly in currency markets on occasion, generally to depress the yen, although it refrains from doing so because of the political concerns of its main trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the yen to depreciate against its major peers. This process has been exacerbated more recently by a widening policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to fight decades-high levels of inflation.

The BoJ’s stance of sticking to ultra-loose monetary policy has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This supports a widening of the spread between US and Japanese 10-year bonds, which favors the US dollar against the Japanese yen.

The Japanese yen is often seen as a safe investment. This means that during periods of market stress, investors are more likely to put their money into the Japanese currency due to its supposed reliability and stability. The troubled times are likely to strengthen the value of the yen against other currencies considered riskier to invest in.

VaselineSeptember 10, 2024

0 2 minutes read

Frequently Asked Questions about the Japanese Yen

Vaseline

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