- USD/JPY continues to decline amid hawkish sentiment regarding the BoJ’s policy stance.
- BoJ’s Nagakawa indicated that the bank might adjust its monetary easing if economic and inflation trends align with projections.
- The CME FedWatch Tool indicates that a 25 basis point Fed rate cut in September is fully priced in.
USD/JPY continues to decline for the second consecutive day, trading around 141.20 during the Asian session on Wednesday. The Japanese Yen (JPY) remains strong following comments from Bank of Japan (BoJ) board member Junko Nagakawa.
Nagakawa mentioned that the BoJ might adjust its monetary easing if economic and price conditions align with its forecasts. Despite the July rate hike, real interest rates are still deeply negative, and accommodative monetary conditions are maintained. The BoJ may reconsider its tapering plans if long-term rates rise significantly during its policy meetings.
The USD/JPY pair’s decline is also influenced by the divergent monetary policies of the BoJ and the US Federal Reserve, which is leading to the unwinding of carry trades and increasing demand for the Yen. BoJ Governor Kazuo Ueda reiterated the central bank’s commitment to raising interest rates if the Japanese economy meets its forecasts through FY2025.
The US Dollar (USD) remains subdued as Treasury yields continue to fall ahead of the US Consumer Price Index (CPI) data due later in the North American session. The upcoming inflation report may provide new insights into the potential size of the Federal Reserve's (Fed) interest rate cut in September. Additionally, recent US labor market data has cast doubt on the likelihood of an aggressive Fed rate cut.
The CME FedWatch Tool indicates that markets fully expect at least a 25 basis point rate cut by the Federal Reserve in September. The probability of a 50 basis point cut has decreased slightly to 31.0%, down from 38.0% a week ago.
