USD/JPY drifts lower ahead of Tokyo CPI and US PCE inflation report

• The Japanese Yen strengthens, dragging USD/JPY below the 147.00 psychological level.
• The US Dollar is pressured by concerns over Fed independence and a dovish monetary policy outlook, overshadowing upbeat US GDP and jobs data.
• Focus shifts to Friday’s July PCE and Japan’s Tokyo CPI, labor and retail figures for fresh direction.

The Japanese Yen (JPY) strengthens against the US Dollar (USD) on Thursday, with USD/JPY slipping below the 147.00 mark as the Greenback remains under pressure. Concerns over the Federal Reserve’s (Fed) independence and expectations of a dovish policy shift, reinforced by Chair Jerome Powell’s remarks at the Jackson Hole Symposium, overshadow the impact of upbeat US data.

At the time of writing, USD/JPY trades near 146.85 in the American session, down around 0.40% on the day. The move coincides with a broader decline in the US Dollar, with the Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, slipping about 0.35% to hover around 97.80.

The second estimate of US Q2 Gross Domestic Product (GDP) showed the economy expanding at an annualized 3.3%, up from the previously reported 3.0%, underscoring a stronger rebound from the weak first quarter. Weekly Initial Jobless Claims also declined to 229,000 in the latest week, pointing to continued labor market stability despite softer hiring trends, while continuing claims edged down to 1.95 million. The preliminary reading of the Personal Consumption Expenditure (PCE) price index, released alongside the GDP, was revised slightly lower to 2.0% in Q2, although core PCE remained unchanged at 2.5%, highlighting persistent underlying price pressures.

Markets are now eyeing Friday’s release of the US PCE inflation report and a packed Japanese economic docket. Consensus expects Tokyo’s headline CPI to ease to 2.6% YoY in August, down from 2.9%. The CPI excluding fresh food is also forecast to dip to 2.5% from 2.9%, while the core CPI excluding food and energy is expected to remain steady at 3.1%, pointing to sticky underlying inflation. Japan’s Unemployment Rate is projected to stay unchanged at 2.5% in July. Industrial production is expected to contract 1.0% MoM, compared with a 2.1% increase previously. Retail Sales are projected to grow 1.8% YoY, down from 2.0%, with seasonally adjusted sales and large retailer sales both showing prior increases of 1.0%.

At its July meeting, the Bank of Japan (BoJ) left interest rates unchanged but raised its inflation forecasts and struck a more upbeat tone on the economic outlook, reinforcing the importance of Friday’s data for near-term policy expectations. The upcoming data will be pivotal in guiding near-term direction for USD/JPY, as traders balance Fed easing expectations against the BoJ’s cautious hawkish stance.