Yen Weakens, While Dollar Gains Ahead Of Data

The Japanese yen fell on Wednesday as investors remained cautious ahead of key US data to be released later in the day, including the US ADP employment change and the ISM services PMI. The focus is expected to shift to the non-farm payrolls report (NFP) to be released on Friday.

The yen could face further downward pressure as the interest rate differential between the US and Japan supports the USD/JPY pair. However, the stronger-than-expected data released by Japan on Wednesday could limit the upside potential for USD/JPY.

Japan’s Nikkei Bank Services PMI for May was revised up to 53.8 from the previous reading of 53.6. Despite the upward revision, the indicator was still below the eight-month peak of 54.3 recorded in April, indicating that growth in the services sector was the weakest since February. In addition, labor cash income rose 2.1% year-on-year in April, exceeding expectations by 1.7%. This latest data also hit the highest level since June last year.

The US dollar index (DXY), which measures the value of the US dollar (USD) against six other major currencies, rose as US Treasury yields rose. However, weak U.S. manufacturing purchasing managers’ index in May increased the probability that the Fed will start cutting interest rates in September.

The Chicago Mercantile Exchange’s FedWatch tool shows that traders currently set the probability of the Fed cutting interest rates by at least 25 basis points at 64.9%, up from 46.3% a week ago.

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