USD/JPY softens to near 149.50 as US PCE data reinforces Fed dovish bets
- USD/JPY edges lower to near 149.50 in Monday’s early Asian session.
- US core PCE inflation steadied at 2.9% YoY in August as expected.
- Expectations that the BoJ might delay rate hikes could undermine the Japanese Yen.
The USD/JPY pair loses ground to around 149.50 during the early Asian session on Monday. The US Dollar (USD) softens against the Japanese Yen (JPY) as the US Personal Consumption Expenditures (PCE) Price Index indicated the Federal Reserve (Fed) is keeping the central bank on pace for interest rate reductions ahead. Traders await the Fedspeak later on Monday for fresh impetus.
Data released by the US Bureau of Economic Analysis on Friday showed that the US PCE rose 2.7% YoY in August versus 2.6% in July. This figure came in line with the market expectation. The core PCE Price Index, which excludes volatile food and energy prices, climbed 2.9% YoY in August, matching July's increase and analysts' estimate. On a monthly basis, the PCE and the core PCE increased 0.3% and 0.2%, respectively.
Though the US central bank targets inflation at 2%, the reports are unlikely to change course for policymakers who last week indicated they see two more 25 basis points (bps) rate cuts before the end of the year. Markets are strongly betting on a rate reduction in October, though there’s a bit less enthusiasm for another move in December. Fed Chair Jerome Powell indicated a lot will depend on upcoming economic data.
On the other hand, political uncertainty in Japan might weigh on the JPY and create a tailwind for the pair. Japan's Liberal Democratic Party (LDP) leadership election will take place on 4 October and the outcome could delay the next interest rate hike by the Bank of Japan (BoJ) if a candidate with dovish views is selected.
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 BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, 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 supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
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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