USD/JPY Fundamental Daily Forecast – Sellers Pause as US Rate Hike Expectations Stabilize

The Dollar/Yen is edging higher on Monday as traders continue to digest last week’s softer-than-expected U.S. consumer and producer inflation reports and the increasing odds of a 50-basis-point Fed rate hike in September against hawkish comments from several Fed officials calling for the central bank to stay on its aggressive hiking path until inflation reaches the mandated 2% level.

The price action reflects a pause in the probability of a super-sized Fed rate hike.

At 04:35 GMT, the USD/JPY is trading 133.195, down 0.293 or -0.22%. On Friday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.08, down $0.19 or -0.27%.

Pressured by Cooling US Inflation, Lower Chances of 75 Basis Point Fed Rate Hike

The USD/JPY fell sharply last week after U.S. Treasury yields tumbled amid signs of cooling consumer and producer price inflation in the United States. This news prompted traders to pare bets calling for a super-sized 75 basis point rate hike by the Federal Reserve in September.

As of Friday’s close, the odds of a 75-bps hike at the September 17 Fed meeting had fallen to around 45 percent and the chances of a 50-bps hike had risen to 55 percent.

Hawkish Fed Comments Creating Floor

After the release of softer-than-expected U.S. consumer inflation data last Wednesday, Minneapolis Fed President Neel Kashkari said he is sticking to his view that the U.S. central bank will need to raise its policy rate another 1.5 percentage points this year and more in 2023, even if that causes a recession.

Chicago Fed President Charles Evans said he believes the Fed has plenty more work to do before inflation is under control.

Following Thursday’s lower-than-expected U.S. Producer Price Index report, San Francisco Federal Reserve Bank President Mary Daly warned it is far too early for the U.S. central bank to “declare victory” in its fight against inflation.

The hawkish comments seemed to have stopped the selling pressure, while putting floor underneath the USD/JPY.

Japan’s Economy Grows Unexpectedly

In economic news, Japan’s economy grew at an annual rate of 2.2% for the April-June quarter from the previous quarter, the government said Monday, as consumer spending rebounded with COVID-19 restrictions getting gradually lifted.

Japan’s gross domestic product, or GDP, the sum of the value of a nation’s products and services, expanded 0.5% from January-March, during which the economy had stayed flat, according to the Cabinet Office’s preliminary estimates. Economists had forecast 0.6% on-quarter growth.

Daily Forecast

Japan’s surprisingly strong GDP is having little impact on the USD/JPY early Monday with most traders focused on Wednesday’s U.S. Retail Sales report and Fed meeting minutes.

Later today at 12:30 GMT, traders will get the opportunity to react to the Empire State Manufacturing Index. At 14:00 GMT, the NAHB Housing Market Index will be released.

The price action is likely to continue to be influenced by the direction of Treasury yields, Fed member comments and the FedWatch Tool that shows the odds of a 50 basis point and 75 basis point rate hike in September. Early Monday, the chances of a 50 basis point rate hike are 55.5%. The probability of a 75 basis point rate hike is 44.5%.