The Japanese Yen is falling against the US Dollar. The USD/JPY pair has risen about 0.35%, trading near 146.00. This decline is happening even though Japan’s inflation is higher than expected and the US Dollar is relatively stable, thanks to steady US Treasury yields. US Treasury yields have slightly favored the Dollar over the Yen, with the 10-year note yield at 4.43%. Some recent US economic data is mixed. For example, the Philadelphia Fed Manufacturing Index is at -4.0, signaling ongoing struggles in manufacturing as labor demand cools, with a negative employment index.

Federal Reserve Report

The Federal Reserve Report gives a mixed view of the US economy, focusing on ongoing inflation and tariffs. The Fed aims for data-driven policies and may consider future rate cuts, helping the Dollar remain strong against lower-yield currencies. In Japan, consumer price index (CPI) rose 3.5% in May, while Core CPI reached 3.7%. This raises questions about what the Bank of Japan (BoJ) will do next. BoJ Governor Kazuo Ueda indicates cautious policy changes, as the goal is still to achieve a stable 2% inflation rate. The BoJ’s long history of ultra-loose policy has contributed to the Yen’s decline. After some policy adjustments, the Yen remains weak due to high inflation and rising wages in Japan, with possible improvements expected in 2024 if the BoJ changes its approach. Recently, the Yen has lost more ground against the Dollar, even with Japan’s strong inflation data. The USD/JPY pair is climbing, hovering around 146. This is happening despite factors that normally support the Yen. Meanwhile, US Treasury yields, particularly for 10-year notes, have stabilized around 4.43%, helping the Dollar gain some strength.

Looking At The Economic Data

Looking at US economic data, there hasn’t been a clear indication of strength or weakness. For example, the Philadelphia Fed Manufacturing Index is at -4.0, suggesting that production sentiment is under pressure. The employment sub-index has also declined, indicating a slowing labor market. However, this weakness hasn’t led to lower Treasury yields, which is keeping the Dollar stable. In terms of policy, the Federal Reserve is focused on incoming data. Recent comments suggest they are open to rate cuts, but this depends on inflation trends. Tariffs are also influencing decisions, and inflation in the US remains uneven. Nevertheless, the rate differentials still favor the US Dollar against lower-yield currencies. Now, focusing on Japan: Consumer inflation rose in May, with headline CPI at 3.5% and core CPI at 3.7%. This usually signals potential tightening, but Ueda has indicated that the BoJ is in no hurry. Their priority is to reach a sustained 2% inflation rate in stable conditions. The market seems to be adjusting to this cautious approach, without clear signals on how quickly any changes may happen. The Yen’s ongoing weakness is linked to Japan’s previous ultra-loose policy. Even with the BoJ’s recent adjustments, the effects haven’t fully materialized. High domestic inflation and wage growth have not strengthened the Yen, especially in light of strong US yields. So, where does this leave us? The interest rate gap favors the Dollar, and Japan’s policymakers are not rushing to react. While inflation data raises questions, the BoJ’s lack of matching signals means the Yen remains weak. Traders might view resistance near 146 as unstable, especially if new data from either country doesn’t present sharp changes. One important area to watch is salary data and purchasing power in Japan, which could influence future decisions. If higher wages contribute to sustainable inflation, the BoJ might feel more confident tightening later this year. However, there has been little guidance indicating imminent changes. Overall, as time progresses, this situation could lead to decreased volatility in this currency pair, unless surprises arise. Fixed income will continue to be a major factor. Monitoring UST curves and BoJ statements will offer critical insights, especially during events where policy discussions may be more open. Create your live VT Markets account and start trading now.

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