- USD/JPY is nearing 147.00, dropping about 0.50% today as the yen benefits from optimism in growth and overall weakness of the USD.
- Japan’s Q2 GDP growth, driven by capital investment and exports, beats expectations, showing a 0.3% quarter-on-quarter increase and a 1.0% annual rise.
- In the US, retail sales grew by 0.5% in July, while industrial production saw a slight decline of 0.1%.
On Friday, the Japanese Yen (JPY) strengthened against the US Dollar (USD), with USD/JPY finding some support during the US trading hours, primarily due to favorable domestic growth data and signs of a softening US economy.
Currently, the pair is trading close to 147.00, down from a daily peak of 147.87, reflecting a decrease of nearly 0.50% today.
Japan’s preliminary GDP for the second quarter revealed an unexpected rise, with the economy growing by 0.3% quarter-on-quarter, beating the 0.1% estimate. Yearly growth picked up to 1.0%, well above the anticipated 0.4%. This surprising growth, spurred by increases in capital expenditure and resilient exports, offset some weakness in private consumption. Such positive indicators are likely to bolster the yen, raising speculation that the Bank of Japan (BOJ) might adopt a more assertive stance in the near future.
Conversely, the mixed economic data from the US has placed additional stress on the dollar. July’s retail sales, which increased by 0.5% aligning with forecasts, still represented a downwardly revised slowdown from June’s 0.9%. Year-on-year growth in retail sales dropped from 4.4% to 3.9%. Additionally, industrial production unexpectedly contracted by 0.1% in July, a deviation from the previously reported 0.3% rise in June. Consumer sentiment also dipped, with the University of Michigan’s index falling from 61.7 to 58.6 in August, even as long-term inflation expectations surged.
This combination of data paints a complex picture; however, the ongoing disinflationary pressure, coupled with rising core prices and inflation expectations, may temper aggressive policy actions. As per the CME FedWatch tool, there’s a 92% probability of a 25 basis point rate cut in September, a shift that appears to be fully factored in following the softer Consumer Price Index (CPI) earlier this week.
Looking ahead, USD/JPY could continue to face vulnerabilities as market sentiment and interest rate forecasts influence activity. The contrasting trends of Japan’s strengthening economic foundations against the uncertain growth and inflation dynamics in the US could keep the pair under pressure.
Next week, investors will focus on the FOMC minutes, S&P Global US PMI data, and Japan’s national CPI report. Any hints from the Fed regarding a more dovish approach, along with signs of economic restraint, could weigh further on the US dollar, while unexpected inflation in Japan might reignite tightening speculation from the BOJ.
