USD/JPY remains bid, approaches 150.00 ahead of US PCE inflation data

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The US Dollar is heading higher for the third day in a row on Friday against a softer Japanese Yen.

The US Dollar approaches the 150.00, on track for a 1.3% weekly rally.
Strong US data prompted traders to cut back Fed easing bets and have boosted the USD.
Later today, the US PCE Price Index is expected to show that inflation increased moderately in August.

The US Dollar is heading higher for the third day in a row on Friday against a softer Japanese Yen. The pair remains bid, with bulls aiming for the 150.00 level, on track for a 1.3% weekly gain with investors awaiting the US PCE Price Index release for further insight into the Fed’s near-term rate path.

An upward revision of US Q2 Gross Domestic Product, coupled with an unexpected decline in weekly jobless claims, calmed fears about a sharp economic slowdown and dampened hopes of a steep Fed monetary easing cycle.

Soft Tokyo CPI has hit the Yen

The Japanese Yen, on the other hand, has been hit by the moderate inflation trends shown by the advanced Tokyo CPI. Headline inflation eased to a 2.5% year-on-year rate in September, from August’s 2.6% reading, while the core inflation grew at a steady 2.5% rate, against expectations of an acceleration to 2.6%.

These figures give further leeway for the Bank of Japan to maintain its wait-and-see approach and cast doubt about the possibility of a rate hike in late October.

The highlight today is August’s US PCE Prices Index, which is expected to show an uptick to a 2.7% yearly rate from 2.6% in July, while the core rate is seen steady at 2.9%. Any figure below the 3% line is expected to keep hopes of further Fed rate cuts alive and might bring some risk appetite back to the market.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.