USD/JPY edges higher above 147.00 despite Fed rate cut hopes
- USD/JPY gains traction to near 147.20 in Monday’s early Asian session.
- Japan’s Tokyo CPI inflation eases in August.
- US PCE stayed higher than the Fed's target in July, but it didn't dash traders' hopes for a rate cut.
The USD/JPY pair gains ground to around 147.20 during the early Asian session on Monday. The Japanese Yen (JPY) softens against the US Dollar (USD) as cooling inflationary pressures in Japan undermine bets of one more interest rate hike by the Bank of Japan (BoJ) this year. Traders await the US ISM Manufacturing Purchasing Managers Index (PMI) report later on Tuesday ahead of highly anticipated US Nonfarm Payrolls (NFP) data.
Inflation in Japan, as measured by the Tokyo Consumer Price Index (CPI), grew at a moderate pace in August. The headline CPI rose 2.5% YoY in August against a 2.9% rise seen in July. Meanwhile, Tokyo CPI ex. Fresh Food climbed by 2.5%, as expected, slower than the previous reading of 2.9%. Signs of cooling inflation prompted traders to reduce bets on a BoJ rate hike, which might weigh on the JPY against the USD in the near term.
On the USD’s front, the US Personal Consumption Expenditures (PCE) report released on Friday showed that US inflation held steady in July but remained above the Federal Reserve's 2% target. Traders priced in a higher chance for a Fed rate cut at the September meeting after the PCE inflation data. This, in turn, might undermine the Greenback against the JPY.
Traders will take more cues from the US employment report later on Friday. The upcoming US NFP report for August could influence the Fed's decision-making. The US economy is expected to see 78,000 job additions in August, while the Unemployment Rate is projected to tick higher to 4.3% during the same report period.
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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