Japanese Yen stands firm near one-week high against USD amid BoJ rate hike bets

• The Japanese Yen continues with its relative outperformance against a weaker USD.

• Signs of broadening inflation in Japan reaffirm BoJ rate hike bets and benefit the JPY.

• The USD remains depressed amid Fed rate cut expectations and weighs on USD/JPY.

The Japanese Yen (JPY) remains on the front foot against its American counterpart during the Asian session on Wednesday and remains close to a one-week high touched the previous day amid a combination of supporting factors. The Summary of Opinions from the Bank of Japan's (BoJ) June meeting showed that some policymakers called for keeping interest rates steady for the time being due to uncertainty over the impact of US tariffs on Japan's economy. Adding to this, the fragile Israel-Iran ceasefire and trade-related uncertainties underpin the safe-haven JPY.

Meanwhile, investors seem convinced that the BoJ will hike interest rates again amid the broadening inflationary pressures in Japan. The bets were reaffirmed by Japan’s Services Producer Price Index (PPI), which rose for the third straight month in May and remained above the 3% YoY rate. In contrast, traders have been pricing in the possibility that the Federal Reserve (Fed) would lower borrowing costs further this year. This, in turn, keeps the US Dollar (USD) bulls on the defensive and suggests that the path of least resistance for the lower-yielding JPY remains to the upside.

Japanese Yen bulls in control as Japan’s Services PPI favor more BoJ rate hikes

The Bank of Japan published the Summary of Opinions from the June monetary policy meeting earlier this Wednesday, which revealed that several board members warned of the expected hit to Japan's fragile economy from sweeping US tariffs. Some policymakers said that consumer inflation was moving at higher-than-expected levels, partly due to surging prices of the staple rice.

In fact, data released last week showed that Japan's annual National Consumer Price Index (CPI) rose by 3.5% YoY in May and remained above the BoJ's 2% target. Further details revealed that the National core CPI – excluding volatile fresh food prices – shot to the highest level since January 2023, while a core gauge that excludes both fresh food and energy prices climbed 3.3% YoY in May.

Adding to this, Japan's Services Producer Price Index, released earlier this Wednesday, increased 3.3% YoY in May, slightly lower than the previous month's upwardly revised reading of 3.4%. The Services PPI  is a key gauge of domestic inflation pressures and back-to-back readings above the 3% mark keep alive market expectations for further interest rate hikes by the central bank.

Meanwhile, Federal Reserve Chair Jerome Powell, in his prepared remarks for the Semiannual Monetary Policy Report to Congress, said that the central bank expects inflation to start rising soon and is in no rush to ease borrowing costs. Powell's remarks come after his colleagues recently suggested a rate cut at the July policy meeting, though it does little to impress the US Dollar bulls.

The Israel-Iran ceasefire came into effect on Tuesday and appeared to hold for now, despite an Israeli attack on Tehran and an Iranian missile strike. Both Iran and Israel have claimed victory in the war and warned they were ready to renew hostilities if the other attacks. This keeps geopolitical risks in play and benefits the safe-haven Japanese Yen amid the divergent BoJ-Fed expectations.

USD/JPY finds acceptance below 200-hour SMA; could slide to 144.00

From a technical perspective, the overnight decline below the 145.35-145.25 resistance-turned-support and acceptance below the 200-hour Simple Moving Average (SMA) was seen as a key trigger for the USD/JPY bears. Moreover, oscillators on the daily chart have just started gaining negative traction and validate the near-term negative outlook for the currency pair. Some follow-through selling below mid-144.00s, or the overnight trough, should pave the way for a slide towards the 144.00 round figure en route to the 143.70-143.65 region before spot prices aim to test sub-143.00 levels.

On the flip side, any attempted recovery might now attract fresh sellers near the 145.00 psychological mark and remain capped near the 145.25-145.35 static barrier. A sustained strength beyond the latter might trigger a short-covering rally and allow the USD/JPY pair to reclaim the 146.00 mark. The momentum could extend further, though it runs the risk of fizzling out quickly near the 146.65-146.70 region. The latter should act as a pivotal point, which if cleared would negate the negative outlook and shift the near-term bias back in favor of bullish traders.