USD/JPY trades lower around 148.00, focus is on US NFP data

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The USD/JPY pair is down 0.25% to near 148.00 during the European trading session on Friday. The asset faces selling pressure as the US Dollar (USD) declines ahead of the United States (US) Nonfarm Payrolls (NFP) data for August, which will be published at 12:30 GMT.

USD/JPY declines to near 148.00 as the US Dollar trades lower ahead of the US NFP data for August.
The impact of the US NFP data will be significant on the Fed’s monetary policy outlook.
The Japanese Yen gains ground as rally in JGB yields hit pause.

At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to near 98.00.

Investors will closely monitor the US official labor market data as it will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.

According to expectations, the US economy added 75K fresh workers, almost in line with the July’s reading of 73K. The Unemployment Rate is expected to have accelerated to 4.3% from the former release of 4.2%.

Currently, the CME FedWatch tool shows that the Fed is certain to cut interest rates by 25 basis points (bps) to 4.00%-4.25% in the September policy. Fed dovish expectations intensified significantly in early August after the July’s NFP report showed a downward revision in individuals employed in May and June.

Meanwhile, the Japanese Yen (JPY) has gained ground as rally in Japan’s long-dated government bond yields hit pause. 30-year Japanese Government Bond (JGB) yields have corrected almost 2.3% from its all-time high of 3.3% to near 3.23%. Investors were dumping JGBs amid mounting fiscal debt concerns across the globe.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.