USD/JPY attracts some buyers above 158.00, investors await US Retail Sales data

USD/JPY edges higher to 158.30 in Tuesday’s early Asian session. 
Fed officials acknowledged significant progress on inflation. 
The pair’s upside might be limited amid the fear of FX intervention by Japanese authorities. 

The USD/JPY pair trades on a stronger note around 158.30 on Tuesday during the early Asian trading hours. The uptick of the pair is bolstered by the modest rebound in US Dollar (USD). Investors will take more cues from the US June Retail Sales and the speech from the Federal Reserve’s (Fed) Adriana Kugler.

Fed Chair Jerome Powell said on Monday the three US inflation readings of this year “add somewhat to confidence” that the inflation is on course to meet the Fed’s target in a sustainable fashion, suggesting a shift to interest rate cuts may not be far off. Fed Bank of San Francisco President Mary Daly stated that inflation is cooling down in a way that bolsters confidence that it’s on its way to 2%. However, Daly added that more information is needed before making a rate decision.

The growing speculation that the US Fed would lower its borrowing costs might undermine the Greenback in the near term. According to the CME’s FedWatch Tool, the market is now pricing in 100% odds that the Fed funds rate will decline by at least 25 basis points when the Federal Open Market Committee (FOMC) meets in September. 

The potential foreign exchange (FX) intervention by Japanese authorities might provide some support to the Japanese Yen (JPY). On Friday, Japanese Finance Minister Shunichi Suzuki highlighted that rapid FX movements are undesirable. Meanwhile, Japanese Chief Cabinet Secretary Yoshimasa Hayashi said that he is “ready to take all possible means on forex.”

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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

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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