USD/JPY trades higher as investors continue to bet on the US economy

• USD/JPY is rising amid a strengthening US dollar as traders become more optimistic about the US economic outlook.
• US employment data released this week will be key to their valuations and likely to impact the pair.
• The Japanese yen remains supported by a slew of positive data and expectations that the BoJ will raise interest rates soon.

USD/JPY trades up half a percent at 146.90s on Monday as the US dollar (USD) continues its recovery from late August lows while the Japanese yen (JPY) slips.

The value of the US dollar gained some momentum after the release of the July Personal Consumption Expenditure (PCE) price index on Friday. PCE is the Federal Reserve’s (Fed) preferred inflation gauge. The data showed U.S. inflation was unchanged from the previous month and helped reassure investors that the U.S. economy was probably not decelerating as quickly as some had feared. In a “soft landing” scenario, the US dollar will hold its strength better than if the economy collapses.

USD/JPY could see gains capped, however, as the JPY finds support from a string of strong data from Japan. Capital spending by Japanese companies rose 7.4 percent in the second quarter, marking the thirteenth straight quarter of growth, data showed on Sunday. Meanwhile, the Jibun Manufacturing PMI was revised up to 49.8 from 49.5 in August, approaching 50 above which would mark expansion.

Data released last week further increased the chances that the Bank of Japan (BoJ) will raise interest rates in the coming months, a move that would support the Japanese yen by boosting foreign capital inflows. Tokyo’s annual flash CPI excluding fresh food for July was 2.4 percent, compared with 2.2 percent the previous month and beating expectations of 2.2 percent, Japan’s Statistics Bureau data showed on Thursday. Data from Tokyo suggested inflation across Japan could show a similar rise.

However, Japan’s employment data was not as strong. Japan’s unemployment rate unexpectedly rose to 2.7 percent in July from 2.5 percent in June.

Analysts at Capital Economics, however, dismissed the rise in unemployment, saying “our belief that the Bank (BoJ) will continue with another rate hike is growing”.

“The jump in the unemployment rate in July is a belated response to the weakness in economic activity earlier in the year,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

US Employment Data Key for USD/JPY

Unlike the yen, employment data could still be key for the dollar after Fed Chairman Jerome Powell highlighted risks to the labor market in his keynote speech in Jackson Hole. Popwell said the risks to the labor market now outweigh the risks from high inflation.

A series of US employment indicators will be released next week, which will provide more detail on just how bad the US employment situation is. These include the ADP hiring change, initial and continuing jobless claims and the main event – ​​the US Bureau of Labor Statistics Nonfarm Payrolls (NFP) report for August, released on Friday.

If US employment data paints a negative picture of the US labor market, it could trigger a USD/JPY sell-off as the greenback depreciates as traders price in steeper interest rate cuts from Fed.

Currently, the odds of the Fed making a big cut of 0.50% at their September 18 meeting are still only around 30%, with a 0.25% cut fully priced in, however, weak employment data of labor could increase the chances of a deeper cut with negative effects on the USD. pairs.