Japanese Yen remains stronger following Tokyo inflation, focus shifts to US PCE

• The Japanese Yen appreciates as increasing Tokyo inflation figures strengthen the BoJ’s hawkish stance on its policy outlook.
• Tokyo’s CPI rose to 2.6% YoY in August, up from 2.2% in July.
• The US Dollar holds its ground following stronger-than-expected economic data from Thursday.

The Japanese Yen (JPY) retraces its recent gains against the US Dollar (USD) following the Tokyo Consumer Price Index (CPI) data released on Friday. The increase in Tokyo inflation strengthens the Bank of Japan’s (BoJ) hawkish monetary policy stance, supporting the JPY and putting downward pressure on the USD/JPY pair.

Tokyo’s Consumer Price Index (CPI) increased to 2.6% year-on-year in August, up from 2.2% in July. Core CPI also rose to 1.6% YoY in August, compared to the previous 1.5%. Additionally, Japan’s Unemployment Rate unexpectedly climbed to 2.7% in July, up from both the market estimate and June’s 2.5%, marking the highest jobless rate since August 2023.

The downside for the USD/JPY pair may be capped, as the US Dollar maintains its recent gains following stronger-than-expected economic data released on Thursday. However, dovish remarks from the Federal Reserve could constrain further gains for the Greenback.

Investors await July’s US Personal Consumption Expenditure (PCE) Price Index scheduled to be released later in the North American Session, seeking clues about the future direction of US interest rates.

Daily Digest Market Movers: Japanese Yen inches higher following Tokyo inflation data

• According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Fed at its September meeting.
• Federal Reserve Atlanta President Raphael Bostic, a prominent hawk on the FOMC, indicated on Thursday that it might be “time to move” on rate cuts due to further cooling inflation and a higher-than-expected unemployment rate. However, he wants to wait for confirmation from the upcoming monthly jobs report and two inflation reports before the Fed’s September meeting.
• The US Gross Domestic Product (GDP) grew at an annualized rate of 3.0% in the second quarter, exceeding both the expected and previous growth rate of 2.8%. Additionally, Initial Jobless Claims showed that the number of people filing for unemployment benefits fell to 231,000 for the week ending August 23, down from the previous 233,000 and slightly below the expected 232,000.
• US Core Personal Consumption Expenditures (QoQ), the Federal Reserve’s preferred measure of underlying inflation, increased by 2.8% in the second quarter, slightly below the market forecast of 2.9%. This marks a significant deceleration from the 3.7% growth observed in the first quarter.
• Japan’s Finance Minister Shunichi Suzuki stated on Tuesday that foreign exchange rates are influenced by a variety of factors, including monetary policies, interest rate differentials, geopolitical risks, and market sentiment. Suzuki added that it is difficult to predict how these factors will impact FX rates.
• Bank of Japan (BoJ) Governor Kazuo Ueda addressed the Japanese parliament on Friday, stating that he is “not considering selling long-term Japanese government bonds (JGBs) as a tool for adjusting interest rates.” He noted that any reduction in JGB purchases would only account for about 7-8% of the balance sheet, which is a relatively small decrease. Ueda added that if the economy aligns with their projections, there could be a phase where they might adjust interest rates slightly further.

Technical Analysis: USD/JPY remains below 145.00

USD/JPY trades around 144.80 on Friday. Daily chart analysis indicates that the pair is positioned above the downtrend line, which points to a weakening bearish bias. Nonetheless, the 14-day Relative Strength Index (RSI) remains above 30, signaling a confirmation of the bearish trend.

On the downside, the USD/JPY pair could test the immediate downtrend line around the level of 144.50. A break below this level could lead the pair to navigate the area around the seven-month low of 141.69, recorded on August 5, followed by the next throwback support at 140.25.

Regarding resistance, the USD/JPY pair may test the immediate barrier at the nine-day Exponential Moving Average (EMA) around 145.15. A move above this level could open the door for the pair to approach the resistance area near 154.50.

USD/JPY: Daily Chart