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USD/JPY consolidates below 145.00 as US PCE inflation takes center stage

  • USD/JPY remains below 145.00 as US core PCE inflation looms.
  • Global market sentiment appears to be asset-specific.
  • The BoJ is expected to raise interest rates again this year.

The USD/JPY pair is trading sideways below the crucial resistance of 145.00 in Thursday's European session. The asset is struggling for direction as investors await the US personal consumption expenditures (PCE) inflation report for July, due to be released on Friday.

Global market action appears to be asset-specific as risk-sensitive currencies faced strong selling pressure while S&P 500 futures posted significant gains during European trading hours. The US dollar index (DXY), which tracks the greenback's value against six major currencies, continues its recovery above 101.20.

US PCE inflation is expected to dictate the next move of the US dollar (USD) as it would influence market speculation for the September meeting of the Federal Reserve (Fed). According to the CME FedWatch tool, the Fed is sure to move to normalize its monetary policy in September, but traders remain divided on the likely size of the rate cuts. The 30-day Federal Funds Futures price tool shows that the probability of a 50 basis point (bp) rate cut is 34.5%, while the rest prefer 25 bp.

In today's session, investors are awaiting revised estimates for second-quarter gross domestic product (GDP) and initial jobless claims for the week ended August 23. Investors will be closely watching the jobless claims data as the Fed is now more concerned about the deteriorating strength of the labor market.

In Japan, the firm expectation of further interest rate hikes by the Bank of Japan (BoJ) continues to support the Japanese yen (JPY). On Wednesday, BoJ Deputy Governor Ryozo Himino said: “There is no change in our stance that we will adjust monetary easing if economic activity and prices are expected to be in line with expectations.”

Meanwhile, investors are awaiting Tokyo Consumer Price Index (CPI) data for August, due to be released on Friday. The inflation report is expected to show that the CPI (excluding fresh food) rose steadily by 2.2%.

Frequently asked questions about the Japanese yen

The Japanese yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, more specifically by the policies of the Bank of Japan, the difference between Japanese and US bond yields or the risk appetite of traders, among other factors.

One of the Bank of Japan's responsibilities is currency control, so its actions are crucial for the yen. The BoJ has sometimes intervened directly in foreign exchange markets, generally to lower the value of the yen, although it often refrains from doing so due to political concerns among its major trading partners. The BoJ's current ultra-loose monetary policy, based on massive economic stimulus, has led to a depreciation of the yen against its major counterpart currencies. This process has recently worsened due to a growing policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to combat decades of high inflation.

The BoJ's stance of maintaining its ultra-loose monetary policy has led to a growing divergence in its policies with other central banks, particularly the US Federal Reserve. This is leading to a widening of the spread between the US and Japanese 10-year bonds, favoring the US dollar against the Japanese yen.

The Japanese yen is often viewed as a safe haven asset. This means that during times of market stress, investors are more likely to put their money into the Japanese currency because it is seen as reliable and stable. Turbulent times are likely to strengthen the yen's value against other currencies that are considered riskier.

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