USD/JPY steadies above YTD low as US inflation takes centre stage
- USD/JPY trades sideways near 143.00 with a focus on the US inflation data for August.
- The US inflation data will influence market expectations for the Fed interest rate cut path.
- Investors see the BoJ hiking interest rates further in the remainder of the year.
The USD/JPY pair steadies near 143.00 in Tuesday’s European session, holding gains generated after rebounding from the Year-to-date (YTD) low of 141.70 on Monday. The asset is expected to trade sideways as investors have sidelined ahead of the United States (US) Consumer Price Index (CPI) data for August, which will be published on Wednesday.
The market sentiment appears to be cautious as the US inflation data is expected to significantly influence market speculation for the Federal Reserve (Fed) interest rate cut path. S&P 500 futures have posted nominal losses in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near 101.60.
Investors see the US annual headline CPI decelerating to 2.6%, the lowest since March 2021, from 2.9% in July. The core inflation-which excludes volatile food and energy prices- is expected to have grown steadily by 3.2%. The significance of the inflation data has increased as the US Nonfarm Payrolls (NFP) data for August failed to provide a precise case about whether the Fed will start the policy-easing cycle aggressively or gradually.
Soft inflation figures would prompt market expectations for the Fed to cut interest rates by 50 basis points (bps) in the monetary policy meeting next week. The confusion over Fed’s likely interest rate cut size would deepen if the figures remain hot or sticky.
Meanwhile, the overall outlook of the Japanese Yen (JPY) remains firm as the Bank of Japan (BoJ) is expected to tighten its monetary policy further amid persistent inflationary pressures. Traders continue to bet for BoJ’s policy-tightening despite Japan’s Q2 Gross Domestic Product (GDP) data coming in lower than projected. Japan’s annualized GDP unexpectedly grew at a slower pace of 2.9%. Investors forecasted Japan’s economy to have expanded at a faster pace of 3.2% from the former release of 3.1%.
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.