Japanese Yen edges lower as the unwinding of carry trades slows

• The Japanese Yen pulls back from six-month highs due to slowing unwinding of carry trades.
• The downside of the JPY could be limited due to increasing odds of further rate hikes by the BoJ.
• The US Dollar faces challenges from rising expectations of a 50-basis point rate cut by the Fed in September.

The Japanese Yen (JPY) retreated from its six-month highs on Tuesday as the unwinding of carry trades slowed. However, the JPY strengthened against the US Dollar (USD) due to growing expectations that the Bank of Japan (BoJ) may implement further monetary policy tightening.

The Bank of Japan raised its short-term rate target by 15 basis points (bps), adjusting it to a range of 0.15%-0.25%. Furthermore, the central bank announced a plan to cut its monthly purchases of Japanese government bonds (JGBs) to ¥3 trillion, starting in the first quarter of 2026.

The upside potential for the USD/JPY pair may be constrained as the US Dollar encounters headwinds from increasing expectations of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September. The CME FedWatch tool shows a 74.5% probability of this rate cut at the September meeting, up sharply from the 11.4% chance reported just a week ago.

Daily Digest Market Movers: Japanese Yen may rise further due to hawkish mood surrounding BoJ

• Japan’s Labor Cash Earnings data showed a 4.5% year-on-year increase in average income for June, surpassing both the previous 2.0% and the expected 2.3% readings. This is the highest increase since January 1997, reinforcing Japan's transition toward a rising interest rate environment.
• According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly expressed increased confidence on Monday that US inflation is moving towards the Fed's 2% target. Daly noted that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.”
• Chicago Fed President Austan Goolsbee stated on Monday that the US central bank is prepared to act if economic or financial conditions worsen. Goolsbee emphasized, "We're forward-looking about it, and so if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it.” according to Reuters.
• US ISM Services PMI rose to 51.4 in July, from the previous reading of 48.8. The index has exceeded the market expectation of 51.0 reading.
• The minutes from the Bank of Japan's June meeting showed that some members expressed concerns about rising import prices due to the recent decline in the JPY, which could pose an upside risk to inflation. One member noted that cost-push inflation might intensify underlying inflation if it results in higher inflation expectations and wage increases.
• US Nonfarm Payrolls (NFP) increased by 114K in July from the previous month of 179K (revised down from 206K). This figure came in weaker than the expectation of 175K, data showed on Friday. Meanwhile, the US Unemployment Rate rose to the highest level since November 2021, coming in at 4.3% in July from 4.1% in June.
• The Bank of Japan (BoJ) released the full version of its Quarterly Outlook Report on Thursday, noting that there is a possibility wages and inflation could exceed expectations. This could be accompanied by rising inflation expectations and a tight labor market.
• Last week, Reuters reported that Japan’s Ministry of Finance confirmed suspicions of market intervention by authorities. In July, Japanese officials spent ¥5.53 trillion ($36.8 billion) to stabilize the Yen, which had fallen to its lowest level in 38 years.

Technical Analysis: USD/JPY advances to near 145.00

USD/JPY trades around 145.20 on Tuesday. The daily chart analysis shows that the pair has halted its losing streak that began on July 30. The 14-day Relative Strength Index (RSI) is below 30, indicating that the currency pair is oversold and may experience a short-term rebound.

The USD/JPY pair may test the throwback support at the 140.25 level, a point observed in December.

On the upside, the USD/JPY pair might encounter resistance at the nine-day Exponential Moving Average (EMA) around 149.22. A break above this level could diminish the bearish bias and allow the pair to test the "throwback support turned resistance" at 154.50, followed by the 50-day EMA at 155.58.

USD/JPY: Daily Chart