Japanese Yen retreats further from two-week high against USD on softer Tokyo CPI

• The Japanese Yen attracts some follow-through sellers after a softer Tokyo CPI print.

• Some follow-through USD buying contributed to the USD/JPY pair’s positive move.

• The US-Japan trade deal optimism and BoJ rate hike bets could help limit JPY losses.

The Japanese Yen (JPY) drifts lower for the second straight day against its American counterpart and retreats further from a two-week high touched the previous day. Data released earlier this Friday showed that consumer inflation in Japan's capital city, Tokyo, slowed more than expected in July. This comes on top of domestic political uncertainty and further complicates the Bank of Japan's (BoJ) policy normalization path, which, in turn, is seen as undermining the JPY.

Meanwhile, the latest trade optimism remains supportive of the underlying bullish sentiment in the markets and turns out to be another factor that dents the JPY's safe-haven status. However, the recently announced Japan-US trade deal reduces economic uncertainty and might hold back the JPY bears from placing aggressive bets. Furthermore, concerns about the Federal Reserve's (Fed) independence could act as a headwind for the US Dollar (USD) and the USD/JPY pair.

Japanese Yen weakens across the board as softer Tokyo CPI tempers BoJ rate hike bets

The Statistics Bureau of Japan reported this Friday that the headline Tokyo Consumer Price Index (CPI) rose 2.9% YoY in July as compared to 3.1% in the prior month. Adding to this, a core gauge, which excludes volatile Fresh Food prices, grew 2.9% against expectations of 3.0%, and the 3.1% in June.

Meanwhile, core CPI that excludes both Fresh Food and Energy prices, and is closely watched by the Bank of Japan as a gauge of domestic demand-driven inflation, eased to the 2.9% YoY rate in July from 3.1% in the previous month. The data provides evidence that inflation in Japan is cooling.

Furthermore, rising political risks, following the ruling coalition's bruising defeat in the upper house election, might keep the Bank of Japan on the sidelines. This suggests that prospects for rate hikes could be delayed for a little bit longer and undermines the Japanese Yen for the second straight day.

The US Dollar, on the other hand, builds on the overnight bounce from a multi-week low and turns out to be another factor that pushes the USD/JPY pair closer to mid-147.00s during the Asian session. However, the uncertainty over the Federal Reserve's rate-cut path could cap gains for the Greenback.

Data released on Thursday showed that US Initial Jobless Claims fell from 221K in the previous week to 217,000 for the week ending July 19, below the 227,000 expected and the lowest level since mid-April. However, Continuing Claims held steady at 1.96 million — near the highest levels since 2021.

Moreover, a first look at S&P Global's PMI showed that business activity in the manufacturing sector lost momentum, while demand in the services sector picked up in July. That said, a gauge measuring the overall business activity – Composite PMI – increased to 54.6 from the previous month’s 52.9.

Nevertheless, the resilient US labor market reinforced the view that the Federal Reserve will hold interest rates next week. US President Donald Trump, however, continued to dial up the pressure on Jerome Powell and expressed his desire for lower interest rates during a rare visit to the Fed.

Meanwhile, Japan's trade deal with the US, announced earlier this week, has reduced economic uncertainty and raised the possibility that the BoJ will resume its tightening cycle later this year. This, in turn, could act as a tailwind for the JPY and keep a lid on any further gains for the USD/JPY pair.

Friday's US economic docket highlights the release of Durable Goods Orders later during the North American session, which could influence the USD price dynamics. Apart from this, the broader risk sentiment would drive demand for the safe-haven JPY and produce short-term opportunities.

USD/JPY could accelerate the positive move once the 147.60 immediate hurdle is cleared

From a technical perspective, the USD/JPY pair on Thursday bounced off the 145.85 confluence – comprising the 100-day Simple Moving Average (SMA) and the 50% retracement level of the monthly upswing. The subsequent move up, along with positive oscillators on the daily chart, backs the case for a further appreciating move. Some follow-through buying beyond the 147.60 area will reaffirm the positive outlook and allow spot prices to reclaim the 148.00 round figure. The momentum could extend further towards the weekly top, around the 148.65 region, above which the currency pair could make a fresh attempt to conquer the 149.00 mark.

On the flip side, the 147.00 round figure now seems to protect the immediate downside ahead of the 146.70-146.65 region, or the 38.2% Fibonacci retracement level. This is closely followed by the 100-day SMA, around the 146.55 area, below which the USD/JPY pair could slide to retest sub-146.00 levels. Some follow-through selling below the 145.75 area (July 10 low) might then drag spot prices to the 145.20-145.15 region, or the 61.8% Fibo. retracement level, en route to the 145.00 psychological mark.