- USD/JPY is attracting fresh sellers following an intraday rally towards the 143.00 level.
- Bank of Japan's hawkish comments push up the yen, putting downward pressure on the currency pair.
- A strong recovery in US dollar demand and an upbeat mood in the market are providing some support.
The USD/JPY pair has failed to capitalize on the modest gains near 143.00 during the Asian session, and for now appears to be stalling its smooth recovery from the roughly nine-month lows hit the previous day. Spot prices are currently trading in the mid-143.00 range, near the lower end of the intraday range, and a prolongation of the recently entrenched downtrend seen over the past two months or so seems likely.
While there are further signs of overall easing in US consumer prices, core CPI indicates underlying inflation remains robust, dashing hopes of a significant 50 basis points (bps) rate cut by the Federal Reserve next week. This will help the US Dollar (USD) regain positive momentum and move closer to a monthly high. Separately, the risk-on impulse weakened the safe haven Japanese Yen (JPY), helping to boost the USD/JPY pair.
The yen's further decline was also fuelled by an unexpected 0.2% fall in Japan's Producer Price Index (PPI) for August, with the annual rate slowing more than expected to 2.5% for the reported month from 3.0% in July. That said, Bank of Japan (BoJ) board member Naoki Tamura's remarks that there is still a very long way to go until the end of monetary easing reaffirmed his view that borrowing costs will rise further by the end of the year, which should help limit the yen's losses.
Moreover, the market is fully pricing in a 25 basis points rate cut from the Fed at its policy meeting on September 17-18, signaling a significant deviation from the hawkish Bank of Japan. This in turn prompted renewed selling in the USD/JPY pair, which was the main reason for the intraday pullback. Traders are now awaiting the release of the US Producer Price Index for fresh momentum, but fundamentals suggest that the path of least resistance for spot prices is to the downside.
