Japanese Yen edges higher against weaker USD

• The Japanese Yen reverses modest Asian session losses against a weaker USD.
• The divergent BoJ-Fed expectations continue to underpin the lower-yielding JPY.
• The BoJ uncertainty and the risk-on mood might keep a lid on the safe-haven JPY.

The Japanese Yen (JPY) turns higher for the second consecutive day on Wednesday against a broadly weaker US Dollar (USD), though it lacks follow-through amid the uncertainty over the likely timing of the next rate hike by the Bank of Japan (BoJ). Data released earlier today showed that wholesale inflation in Japan slowed for the fourth month in July. This comes on top of domestic political uncertainty and concerns about the potential negative impact of higher US tariffs on the economy, which suggests that the prospects for further policy normalization by the BoJ could be delayed further.

Apart from this, the prevalent risk-on environment, bolstered by an extension of the US-China trade truce and the US-Russia summit aimed at ending the war in Ukraine, turns out to be another factor undermining the safe-haven JPY. Investors, however, seem convinced that the BoJ will hike interest rates by the end of this year. In contrast, the Federal Reserve (Fed) is expected to cut interest rates in September, and the bets were reaffirmed by the broadly in-line July US consumer inflation figures on Tuesday. This keeps the USD depressed and further benefits the lower-yielding JPY.

Japanese Yen bears seem non-committed amid mixed BoJ rate hike cues, weaker USD

• The Bank of Japan revised its inflation forecast at the end of the July meeting and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. However, domestic political uncertainty, concerns about the negative economic impact of higher US tariffs, and a continuous fall in Japan’s real wages suggest that the prospects for further BoJ policy normalization could be delayed.
• Meanwhile, data released this Wednesday showed that Japan’s Corporate Goods Price Index (CGPI) climbed 2.6% in July from a year earlier, down from a 2.9% increase in the previous month. However, a rise in the wholesale prices of food and agricultural goods points to signs of broadening inflationary pressure, which keeps alive market expectations for an imminent interest rate hike by the BoJ by the end of this year.
• The S&P 500 and the Nasdaq posted record closing highs on Tuesday. The spillover effect remains supportive of the upbeat market mood and pushes Japan’s Nikkei225 to the 43,000 mark for the first time ever on Wednesday. This, along with the BoJ rate-hike uncertainty, prompts fresh selling around the safe-haven Japanese Yen following the overnight bounce from a one-week low touched against the US Dollar.
• The USD Index (DXY), which tracks the Greenback against a basket of currencies, consolidates Tuesday’s downfall amid the growing acceptance that the Federal Reserve will resume its rate-cutting cycle next month. The bets were reaffirmed by mostly in line US consumer inflation figures released on Tuesday. This, in turn, might hold back traders from placing aggressive bullish bets around the USD/JPY pair.
• The US Bureau of Labor Statistics reported that the headline Consumer Price Index (CPI) remained unchanged at 2.7% on a yearly basis in July. On a monthly basis, the CPI and the core CPI rose by 0.2% and 0.3%, respectively, to match analysts’ estimates. However, the core gauge, which excludes food and energy prices, came in above market estimates and increased to the 3.1% YoY rate from the 2.9% in June.
• The data support the view that recent tariff-related price pressures will be largely transitory. This, along with signs of deteriorating US labor market conditions and that the economy could be weakening, reinforces the narrative for a September interest rate cut by the Fed. Moreover, traders are currently pricing in a higher probability that the Fed will lower borrowing costs at least twice by the year-end.
• There isn’t any relevant market-moving economic data due for release from the US on Wednesday, leaving the USD at the mercy of speeches from a slew of influential FOMC members. The market focus will then shift to the US Producer Price Index, due on Thursday, which will be followed by the Preliminary Q2 GDP print from Japan on Friday and could infuse some volatility around the USD/JPY pair.

USD/JPY corrective pullback might still be seen as a buying opportunity near 147.00

From a technical perspective, spot prices showed some resilience below the 147.75 resistance-turned-support for the second straight day. Moreover, the emergence of some dip-buying suggests that the path of least resistance for the USD/JPY pair is to the upside. Hence, a subsequent move towards the overnight swing high around the 148.50-148.55 area, en route to the 149.00 round figure, looks like a distinct possibility.

On the flip side, weakness below the Asian session low, around the 147.70 region, might still be seen as a buying opportunity near the 147.00 mark and remain limited near the 146.80 support. The latter represents the 200-period Simple Moving Average (SMA) on the 4-hour, which, if broken, could make the USD/JPY pair vulnerable to test sub-146.00 levels and slide further to the 145.00 psychological mark.