USD/JPY establishes above 161.00 as Yen weakens on BoJ policy uncertainty

• USD/JPY stays strong above 161.00 amid sheer weakness in the Japanese Yen.
• The BoJ eyes further policy tightening due to the weak Yen.
• Weak US Manufacturing PMI weighs on the US Dollar.

The USD/JPY pair shifts auction above 161.00 in Monday’s New York session. The asset strengthens further as the Japanese Yen weakens amid uncertainty over Bank of Japan’s policy outlook. Recent BoJ policy minutes showed that officials favored further policy tightening as the weak Japanese Yen is boosting inflationary pressures.

Sheer depreciation in the Japanese currency has made exports more competitive and has prompted import costs. Growing speculation for more rate hikes appears to be unpleasant for investors as they expect that the wage-growth spiral should be the reason behind further policy tightening.

Also, expectations of Japan’s intervention in the FX domain are high as Yen has weakened to a multi-decade low against the US Dollar (USD). Japan’s administration has been warning of a stealth intervention against rapid, one-sided FX moves.

Meanwhile, the US Dollar faces pressure due to weak United States (US) ISM Manufacturing PMI data for June. The Manufacturing PMI, which gauges activities in the factory sector, unexpectedly declined to 48.5. Economists expected the factory activity to improve to 49.1 from the prior release of 48.7. A figure below the 50.0 threshold is considered as contraction in manufacturing activities.

Inflation in the manufacturing sector also dropped as the Prices Paid index, which indicates prices paid for inputs such as raw materials and wages, expanded at a slower pace to 52.1 from the estimates of 55.9 and the prior release of 57.0.

A decline in the Prices Paid suggests a softening of price pressures. This will boost expectations of early rate cuts by the Federal Reserve (Fed).