Japanese Yen strengthens against US Dollar due to firm Fed rate cut bets

The Japanese Yen surges against the US Dollar as the latter weakens due to firm Fed rate cut prospects.
The Fed is expected to start reducing interest rates from September.
Investors await Japan’s National CPI for fresh guidance on interest rates.

Akhtar Faruqui FXStreet

The Japanese Yen (JPY) rallies against the US Dollar (USD) in Wednesday’s European session. The USD/JPY pair weakens to 156.00 due to a sharp sell-off in the US Dollar, which is prompted by a highly-likely rate-cut decision by the Federal Reserve (Fed) in its September policy.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, tumbles to near 103.70. 10-year US Treasury yields have declined slightly to 4.16%.

Signs of progress in disinflation and cooling labor conditions drive firm Fed rate-cut prospects for September. Recent consumer inflation readings for June showed that price pressures decelerated at a faster-than-expected pace. The monthly headline inflation dipped for the first time in more than four years. On the labor market front, Unemployment Rate rose to 4.1%.

Meanwhile, the confidence of Fed officials that inflation has returned to the path of 2% has improved. Fed Chair Jerome Powell acknowledged at the Economic Club of Washington on Monday that recent inflation data has added to confidence that inflation is oncourse to return to the desired rate of 2%. However, he mentioned that policymakers need to gain more confidence before considering rate cuts.

This week, various Fed speakers lined up to provide guidance on inflation and interest rates.

On the Tokyo front, investors await the National Consumer Price Index (CPI) report for June, which will be published on Thursday. The inflation data will provide cues about whether the Bank of Japan (BoJ) will tighten its monetary policy further in its upcoming meeting on July 31.

Japan’s annual National CPI ex. Fresh Food is estimated to have accelerated to 2.7% from May’s reading of 2.5%.

Economic Indicator

National CPI ex Fresh Food (YoY)

Japan’s National Consumer Price Index (CPI), released by the Statistics Bureau of Japan on a monthly basis, measures the price fluctuation of goods and services purchased by households nationwide excluding fresh food, whose prices often fluctuate depending on the weather. The YoY reading compares prices in the reference month to the same month a year earlier. Generally, a high reading is seen as bullish for the Japanese Yen (JPY), while a low reading is seen as bearish.

EUR/USD deflates to fresh lows, targets 1.1600

The selling pressure on EUR/USD now gathers extra pace, prompting the pair to hit fresh multi-week lows in the 1.1625-1.1620 band on Friday. The continuation of the downward bias comes in response to further gains in the US Dollar as market participants continue to assess the mixed release of US Nonfarm Payrolls in December.

GBP/USD breaks below 1.3400, challenges the 200-day SMA

GBP/USD remains under heavy fire and retreats for the fourth consecutive day on Friday. Indeed, Cable suffers the strong performance of the Greenback, intensified post-mixed NFP, and trades at shouting distance from its critical 200-day SMA near 1.3380.

Gold flirts with yearly tops around $4,500

Gold keeps its positive bias on Friday, adding to Thursday’s advance and challenging yearly highs in the $4,500 region per troy ounce. The risk-off sentiment favours the yellow metal despite the firmer tone in the Greenback and rising US Treasury yields.