- USD/JPY snapped a four-day losing streak following weak Japanese GDP data on Monday.
- Friday's U.S. labor data reduced the chances of a bold Fed interest rate cut in September.
- The CME FedWatch tool suggests the probability of a 50 basis point Fed rate cut has slightly decreased to 29.0%.
USD/JPY halted a four-day losing streak and traded near 142.90 in the Asian session on Monday. The recovery in the USD/JPY pair was partly driven by weaker-than-expected Japanese Gross Domestic Product (GDP) data. However, strong economic growth, wage growth, and persistent inflationary pressures continue to support expectations that the Bank of Japan (BoJ) may further raise interest rates, which could limit the Japanese Yen's (JPY) decline.
Japan's GDP grew at an annualized rate of 2.9% in the second quarter, slightly below the flash estimate of 3.1% and the market forecast of 3.2%, but it was the strongest annual growth rate since the first quarter of 2023. On a quarterly basis, GDP grew 0.7% in the second quarter, below the market forecast of 0.8%, but still the strongest quarterly growth since the second quarter of 2023.
Additionally, the US dollar received support as US economic data on Friday raised uncertainty about the likelihood of a bold interest rate cut from the Federal Reserve at its September meeting. According to the CME FedWatch tool, the market fully expects at least a 25 basis points (bps) rate cut at the September meeting. The likelihood of a 50 bps rate cut has slightly decreased to 29.0% from 30.0% a week ago.
The U.S. Bureau of Labor Statistics (BLS) announced that nonfarm payrolls (NFP) rose by 142,000 in August, below the expected 160,000 but an improvement from July's downwardly revised figure of 89,000. Meanwhile, the unemployment rate fell to 4.2% from 4.3% in the previous month, as expected.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by the performance of the Japanese economy, but more specifically by factors such as the Bank of Japan's policies, the spread between Japanese and US bond yields, and traders' risk sentiment.
The Bank of Japan's movements are important for the yen, since one of its mandates is currency management. The bank sometimes intervenes directly in the currency market to weaken the yen, but often refrains from doing so due to political concerns with major trading partners. The current BOJ's ultra-loose monetary policy, based on a massive economic stimulus package, has caused the yen to weaken against major currencies. This process has worsened in recent times due to the widening divergence between the policy of the Bank of Japan and other major central banks, which have chosen to significantly raise interest rates to combat inflation at its highest level in decades.
The Bank of Japan's insistence on ultra-loose monetary policy has led to a growing divergence in policy with other central banks, particularly the U.S. Federal Reserve, which has helped to widen the gap between 10-year U.S. Treasury bonds and Japanese government bonds, giving the U.S. dollar an edge over the Japanese yen.
The Japanese Yen is often seen as a safe investment, meaning that during times of market turmoil, investors are more likely to put their money into the Japanese Yen due to its reliability and stability. In times of volatility, the yen tends to rise in value against other currencies that are considered riskier investments.
