USD/JPY Extended Gains To Around 161.50 Ahead Of US Data & Fed Minutes

USD/JPY hit a new high near 161.75 in early Asian trading on Wednesday and strengthened to around 161.40. Market participants are still watching for possible foreign exchange (FX) intervention measures by the Bank of Japan (BoJ), which may limit the upside of the currency pair. The final reading of Japan’s Nikkei Bank Services Purchasing Managers’ Index will be released on Wednesday. In the United States, the US June ADP employment change, ISM Services PMI and Fed minutes will be released.

Monday’s weak US manufacturing Purchasing Managers’ Index (PMI) data and last week’s weak PCE inflation report have fueled expectations of a rate cut by the Federal Reserve (FED) this year and put pressure on the US dollar (USD). Fed Chairman Jerome Powell said on Tuesday that he has seen progress in addressing inflation over the past year, adding that the Fed is getting back on track to curb inflation. However, Powell noted that “we want to have more confidence that inflation is sustainably moving back toward 2% before we begin the process of tapering or easing policy.”

Financial markets have adjusted expectations for two rate cuts from the Federal Reserve this year, in September and before the end of the year. Despite this, Fed officials only raised the possibility of one rate cut at their June meeting. The CME FedWatch tool shows that traders are currently pricing in a nearly 63% probability of a 25 basis point (bps) rate cut by the Federal Reserve in September, up from 58% on Monday.

The Japanese yen (JPY) weakened further due to the divergence in monetary policy between the Bank of Japan (BoJ) and the US Federal Reserve (Fed). Japanese authorities are concerned about the impact of “rapid one-sided” fluctuations in the exchange rate on the Japanese economy, and they may intervene in the foreign exchange market to prevent the yen from depreciating. This in turn may support the yen in the short term and be bearish for the USD/JPY currency pair.

Analysts at OCBC Bank said that USD/JPY continues to trade near recent highs. This is also close to its highest level since 1986. There is an expectation that Japanese authorities may intervene soon. While the level of the yen is a consideration, officials will also focus on the speed of depreciation as the purpose of intervention is to curb excessive volatility.

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