Will USD/JPY reach 200 without intervention?
- USDJPY needs interventions and rate hikes.
- Monetary policy divergence is pushing EURUSD lower.
The US dollar found no clues in Kevin Warsh’s comments, and attention shifted to the US labour market report for June. The Fed Chair noted a reduction in inflationary risks and reaffirmed the central bank’s commitment to bringing inflation back to the 2% target. He did not rule out a rate hike in July.
Investors interpreted Kevin Warsh’s comments as hawkish, pushing the probability of two rate rises in 2026 back up to 46%. The odds of a monetary policy tightening in September are estimated at two in three.
This divergence plays into the hands of the bears on EURUSD, as there is a split within the ECB. This reduces the likelihood of a deposit rate hike. The hawks believe that inflation is permeating all sectors of the eurozone economy. It will manifest as increased demand for wage rises and a delayed rise in food prices. Conversely, the doves believe that, due to the fall in oil prices, the CPI has already peaked and will decline.
This was borne out by the latest report, which noted a slowdown in inflation in June, from 3.2% to 2.8%. The futures market is pricing in the possibility of a deposit rate hike in 2026. However, investors believe that should monetary policy tightening occur, it will be the last in this cycle, which is holding back EURUSD buyers.
In Japan, rumours are intensifying that the weakening of the yen could accelerate the process of raising the overnight rate. Previously, the market expected the BoJ to tighten monetary policy every six months, but lately it has put a 60% probability on another hike in October following the June increase. The combination of a weakening national currency and strong business activity carries the risk of a significant surge in inflation. If the central bank allows inflation to spiral out of control, it will be forced to resort to aggressive monetary tightening.
Meanwhile, Mizuho Bank expects USDJPY to reach 170, Sumitomo Mitsui Financial Group forecasts it to reach 180, while Monex Group and Blue Edge Advisors do not rule out a rally to 200.
The yen has rebounded from its 40-year lows following comments by Atsushi Mimura, Vice Finance Minister for International Affairs. He stated that the previous currency interventions in April and May were justified and that the US has no objection to further interventions in the forex market.
Summary: The weaker yen increases the risk of market intervention and a tighter BoJ policy, while the divergence in policy between the Fed and the ECB is putting pressure on EURUSD.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
