The yen is on track for its strongest week in nearly three months, with traders unwinding long-held bets against the frail currency ahead of crucial U.S. inflation data that could solidify rate cut expectations.
Yen’s Performance:
- USD/JPY Movement: The yen surged to a near three-month high of 151.945 per dollar on Thursday, after starting the month at a 38-year low of 161.96 per dollar. As of Friday, the yen was last at 153.66, marking a 2.5% rise for the week.
- Safe Haven Demand: A global stocks sell-off drove investors towards safe assets, including the yen.
Market Influences:
- Suspected Interventions: Tokyo’s suspected interventions in early July disrupted traders and led to an unwinding of profitable carry trades, where traders borrow the yen at low rates to invest in higher-return dollar-priced assets.
- Investor Sentiment: With risk assets losing their appeal and data suggesting upcoming rate cuts, the yen has further room to appreciate despite expectations of consolidation soon.
U.S. Economic Data:
- PCE Data: Investor focus on Friday will be on the U.S. personal consumption expenditure data, the Federal Reserve’s favored inflation measure, expected to come in at 0.1% on a monthly basis.
- Federal Reserve Outlook: The Fed is expected to hold rates steady next week, with markets fully pricing in a rate cut in September and anticipating 66 basis points of easing this year.
Bank of Japan Policy:
- Rate Hike Prospects: The BOJ may raise rates next week, with markets pricing in a 64% chance of a 10 bps hike. Recent data showed core inflation in Japan’s capital accelerated for the third straight month in July.
- Policy Tightening: The yen’s surge might reduce immediate pressure on the BOJ to tighten policy, though balance sheet reduction details are still expected.
Global Currency Movements:
- Dollar Index: The dollar index (DXY) was little changed at 104.29. The euro was slightly stronger at $1.08575.
- U.S. Economic Resilience: Data showing the U.S. economy expanded faster than expected and inflation slowed in Q2 has supported the dollar. Analysts expect the first Fed rate cut in November, contingent on a series of lower inflation readings.
Sterling and Risk Sentiment:
- GBP/USD: Sterling was 0.12% higher at $1.2865, well below the one-year high of $1.3044 hit last week. Markets see a 50% chance of a Bank of England rate cut next week, with 51 bps of cuts anticipated this year.
- AUD/USD and NZD/USD: Both the Australian and New Zealand dollars, seen as risk proxies, were down nearly 2% for the week. On Friday, the Aussie was up 0.23% at $0.6552, and the kiwi was up 0.13% at $0.5891.
As these developments unfold, market participants will closely monitor central bank actions, economic data releases, and political events, which are likely to drive currency and commodity movements in the coming weeks.
