USD/JPY drifts lower to near 155.05 on Fed rate cut expectations, US PCE inflation data in focus

USD/JPY softens to around 155.05 in Friday’s early Asian session.
The US Fed is anticipated to cut rates at its December meeting next week.
BoJ is likely to raise rates in December, said Reuters.

Lallalit Srijandorn FXStreet

The USD/JPY pair remains weak near 155.05 during the early Asian session on Friday. Rising bets for a rate cut by the US Federal Reserve (Fed) next week and weaker US economic data weigh on the US Dollar (USD) against the Japanese Yen (JPY). All eyes will be on the US delayed Personal Consumption Expenditures (PCE) Price Index inflation data for September later on Friday.

Traders widely expect a rate reduction when the Fed meets next week and will closely monitor signals on the policy path ahead. Financial markets are currently pricing in nearly a 90% probability of a quarter-point rate cut next week, according to the LSEG data.

"Traders are doubling down on bets the Fed will cut rates and stop short of delivering an overtly-hawkish message at next week’s meeting," said Karl Schamotta, chief market strategist at Corpay.

Expectations that the Bank of Japan (BoJ) will raise interest rates when it meets in December provide some support to the Japanese Yen (JPY) and create a headwind for the pair. Three government officials told Reuters that the BoJ is likely to raise its policy rate to 0.75% from 0.5% after hawkish remarks from Governor Kazuo Ueda.

Ueda said earlier on Monday that the Japanese central bank will consider the "pros and cons" of raising rates this month, signaling a strong chance of a hike at the December 18-19 meeting. This would be the first hike since January.

The upbeat US jobs data released on Thursday might help limit the Greenback’s losses in the near term. The US Initial Jobless Claims declined to 191,000 for the week ending November 29, compared to 218,000 the previous week, the US Department of Labour (DOL) showed. This figure came in lower than the market consensus of 220,000.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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