During the Asian trading session on Friday, the USD/JPY currency pair fell below the mid-141.00s and approached its year-to-date low. This decline is part of a broader downtrend that has persisted for the past two months, driven by shifting economic signals and central bank policies.
The US Dollar (USD) dropped to a new weekly low following heightened speculation that the Federal Reserve (Fed) may implement a more aggressive policy easing next week. This sentiment was reinforced by Wednesday’s release of a weaker-than-expected US Producer Price Index (PPI) report. Market expectations now suggest a greater than 40% chance that the Fed will cut interest rates by 50 basis points at the conclusion of its September meeting. This anticipated policy shift has kept US Treasury bond yields near their 2024 lows, contributing to the USD’s weakness and pushing the USD/JPY pair lower.
Conversely, the Japanese Yen (JPY) is buoyed by the Bank of Japan‘s (BoJ) hawkish stance, which signals potential interest rate hikes if the economic conditions align with forecasts. On Thursday, BoJ board member Naoki Tamura noted that the path to ending the current easy monetary policy remains lengthy. This contrasts sharply with the dovish expectations surrounding the Fed and has led to further unwinding of JPY carry trades, adding pressure to the USD/JPY pair.
Given the current economic backdrop, the path of least resistance for the USD/JPY pair appears to be downward. However, traders might opt for caution as they await significant central bank announcements next week. The Fed is set to reveal its decision at the end of a two-day meeting next Wednesday, followed by the BoJ’s policy update on Friday. These events will likely determine the next directional move for the USD/JPY pair. As it stands, the pair is on track to finish the week with significant losses for the second consecutive week.
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