USD/JPY extends gains near 161.50 ahead of US data, FOMC Minutes

■USD/JPY remains strong around 161.40 in Wednesday’s early Asian session. 

■Fed’s Powell said US inflation is cooling again, but more evidence would be needed before the Fed would cut rates.

■The monetary policy divergence between Japan and the US exerts some selling pressure on the Japanese Yen.

The USD/JPY pair trades on a stronger note near 161.40 after reaching a new high for this move near 161.75 during the early Asian trading hours on Wednesday. Market players remain focused on the possible foreign exchange (FX) intervention from the Bank of Japan (BoJ), which might cap the pair’s upside. The final print of Japan’s Jibun Bank Services PMI is due on Wednesday. On the US docket, the US June ADP Employment Change, ISM Services PMI, and the FOMC Minutes will be released. 

The weaker US Manufacturing PMI data on Monday and softer PCE inflation reports last week have spurred the expectation of a Federal Reserve (Fed) rate cut this year and weighed on the US Dollar (USD). Fed Chair Jerome Powell said Tuesday that he saw progress in inflation over the past year, adding that the central bank is getting back on the disinflationary path. However, Powell noted that “we want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”

Financial markets have adjusted to expect two rate cuts this year, in September and before the end of the year. Nonetheless, Fed officials penciled in just one rate cut in its June meeting. Traders are now pricing in a nearly 63% chance for a 25 basis points (bps) rate cut from the Fed in September, up from 58% on Monday, according to the CME FedWatch tool.

The Japanese Yen (JPY) weakens further, fueled by the divergence in monetary policies between the Bank of Japan (BoJ) and the US Fed. Japanese authorities are concerned about the impact of "rapid and one-sided" FX moves on the Japanese economy and they might intervene in the FX market to prevent the JPY from depreciating. This, in turn, might underpin the JPY in the near term and create a headwind for the USD/JPY pair. 

“USD/JPY continued to trade near recent highs. This is also near the highest level since 1986. There are expectations that Japanese authorities could soon intervene. While the level of JPY is one factor to consider, officials also focus on the pace of depreciation as the intent of intervention is to curb excessive volatility,” said OCBC analysts.