Japanese Yen gains on hawkish BoJ outlook and softer US Dollar

• USD/JPY trades lower as a softer US Dollar and hawkish BoJ expectations support the Japanese Yen.
• Traders cut the chance of a September Fed hike to 30% after a batch of softer US economic data.
• The BoJ could raise rates next month and quicken the pace of tightening, according to Reuters.

USD/JPY trades on the back foot on Friday, pressured by a weaker US Dollar (USD), while the Japanese Yen (JPY) draws support from a more hawkish Bank of Japan (BoJ) outlook. At the time of writing, the pair trades around 158.85, down 0.40% on the day.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.50, down 0.47% on the day. Fading expectations of a near-term Federal Reserve (Fed) interest-rate hike are keeping USD bulls on the defensive.

According to the CME FedWatch Tool, traders now see only a 30% chance of a rate hike at the September meeting, down from more than 50% a week ago. The repricing comes after the July Consumer Price Index (CPI) and Producer Price Index (PPI) reports showed easing inflationary pressure, with spillovers from elevated Oil prices appearing limited so far.

Adding to the softer data, figures released on Friday showed that US Retail Sales fell by 0.6% in July, missing expectations for a 0.1% increase and reversing the previous month’s 0.2% gain. Earlier, the weaker-than-expected July Nonfarm Payrolls (NFP) report signalled that the labour market is struggling to find its footing.

Taken together, the softer inflation, consumer spending and labour market data make it harder for the Fed to justify an interest-rate hike anytime soon. In contrast, expectations are growing that the BoJ will raise interest rates next month.

Reuters reported on Friday, citing three sources familiar with the central bank’s thinking, that the BoJ could raise rates as soon as September and is considering a faster pace of tightening thereafter.

Strategists at Rabobank note that, in Japan, “the debate looks even more skewed towards further tightening.” They highlight that Prime Minister Sanae Takaichi has “once again stressed the importance of Bank of Japan independence while also emphasising the need to achieve the inflation target sustainably,” underscoring the authorities’ growing emphasis on durable price stability.

Following the recent intervention to support the Yen, Rabobank adds that policymakers are “increasingly aware that exchange-rate management ultimately requires support from monetary policy,” reinforcing the case for additional BoJ action.