Japanese Yen gains as US Dollar retreats ahead of FOMC Minutes

USD/JPY edges lower on Wednesday as the US Dollar (USD) loses momentum and retreats toward the June lows touched earlier this week. At the time of writing, the pair trades around 159.10, down 0.32% on the day.

Meanwhile, the Japanese Yen (JPY) outperforms most of its major peers as the risk of further foreign-exchange intervention and hawkish Bank of Japan (BoJ) expectations discourage traders from building large bearish positions against the currency.

The Greenback takes its cue from the recent dovish repricing of Federal Reserve (Fed) rate expectations, although the monetary policy outlook remains uncertain. Recent US economic data have reduced the likelihood of an interest rate hike at the September meeting.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 99.40, down 0.23% on the day.

However, persistent inflation concerns, particularly those linked to higher energy costs, keep expectations of a future rate hike alive. The stalemate between the United States and Iran has left shipping through the Strait of Hormuz heavily restricted, supporting Oil prices and raising the risk of another acceleration in inflation that could eventually force the Fed to raise interest rates.

Traders now await the release of the Minutes from the Federal Open Market Committee’s (FOMC) July meeting, due at 18:00 GMT, for fresh clues about the Fed’s policy outlook.

On the Japanese side, despite its intraday strength, the Yen remains structurally weak as fiscal concerns, higher Oil prices and wide interest rate differentials with other major economies continue to pose strong headwinds.

Analysts at MUFG note that “in Japan, markets have continued to price in more BoJ tightening for the next 12 months”. They add that, “together with recent [Y]en intervention, this has helped stabilize USDJPY around the 160.00 level and contained further [Y]en depreciation for now.”

However, MUFG cautions that “Japan’s weaker-than-expected Q2 GDP growth raises questions about how aggressively the BoJ can tighten policy over the coming months, potentially challenging the extent of rate hikes currently being priced in by markets,” suggesting that the current market path for Japanese rates may face greater scrutiny ahead.