USD/JPY hits ceiling at 148

Yesterday, the USD/JPY pair repeated its previous trajectory. The US dollar once again attempted to break through the 147.8 level but then pulled back. What is holding the greenback back from crossing this line, and how long will it continue to go back and forth?

Last Wednesday, forex traders were focused on the US consumer price growth data for August. Many anticipated clarity from the inflation report regarding the Federal Reserve's future policies, but the data only made things more complicated.

The statistics came out mixed. On the one hand, there was a significant acceleration in the headline annual inflation rate, but on the other, its core component showed a decline. This ambiguous data influenced the USD dynamics.

A silver lining for the dollar bulls was a sharp jump in headline inflation last month, which surpassed market expectations and made the highest increase since June 2022, from 3.2% to 3.7%.

This rise in US inflation bolstered traders' hopes for further monetary tightening in the US. After the release, futures markets increased the likelihood of a Fed interest rate hike in November or December to 49.2%, up from 40% a week earlier.

The prospect of further tightening prompted the US dollar to surge against other currencies, including the yen. Yesterday, the USD/JPY pair closely approached the 10-month high at 148, before retreating to 147.1.

The downside pressure on the greenback stemmed from another part of the inflation report - the core CPI. In August, this metric (which excludes volatile food and energy prices) declined year-over-year from 4.7% to 4.3%.

These intensifying signs of disinflation in the US left traders nearly certain that the Fed would adopt a wait-and-see stance at its September meeting, resisting a rate hike. Currently, the market is 97% sure of this outcome, up from 92% a day earlier.

Notably, the US regulator is expected to announce its interest rate decision next week, on September 20. Anticipation of a pause in the current tightening cycle may cap the dollar's short-term gains, even if today's US macroeconomic data provides support.

Thursday will see the release of statistics on initial jobless claims, the Producer Price Index (PPI), and retail sales indices.

These figures are likely to have a minimal impact on the USD/JPY pair. Analyst predictions suggest that the major currency pair will continue to consolidate at current levels by week's end. This is due to the prevailing uncertainty in the market regarding both the Federal Reserve and the Bank of Japan.

At the start of the week, the Japanese currency strengthened by 1.3% against the dollar, trading at a weekly high of 145.91. The yen's sharp rise was propelled by hawkish comments from the head of the Bank of Japan.

In an interview to the Yomiuri newspaper, Kazuo Ueda stated that the Bank of Japan would consider ending its negative interest rate policy as soon as it sees consistent growth in prices and wages.

When questioned about the potential timeline for such a move, the official speculated that the regulator might gather sufficient data to assess wage and inflation growth by the end of the current year.

Initially, the market perceived Ueda's words as a hint towards an imminent monetary pivot by the Japanese regulator, which essentially triggered the yen's rally.

However, a broader sentiment emerged later, suggesting that the BOJ governor's hawkish rhetoric was merely an attempt to provide short-term support to the Japanese currency and deter speculative selling.

Last week, when the yen fell against the dollar to the 147.8 level, Tokyo expressed heightened concerns over the weakness of its national currency and threatened speculators with currency intervention.

Accusations of tactical maneuvering against Ueda brought the yen back to its recent lows against the dollar. Despite this, traders are hesitant to fully quash speculations regarding the Bank of Japan's imminent capitulation.

Currently, they are eagerly awaiting the BOJ's September meeting to understand Ueda's intentions: is he playing a deceptive game, or is he genuinely probing the grounds for monetary policy normalization in Japan?

If the Japanese regulator maintains its status quo and does not consider options to exit from its ultra-loose monetary policy in the upcoming meeting next week, it will exert significant pressure on the yen and could lead it to new record lows against the dollar.

On the other hand, if the BOJ attempts to expand on the hawkish sentiments previously voiced by its chairman, the effect would be quite the opposite. The yen could experience a parabolic rise across the board, including against the dollar.

For now, with prevailing uncertainty regarding the Bank of Japan's future policies, the yen's dynamics remain constrained.

From what we observe, there don't seem to be any strong triggers on the horizon that could move the USD/JPY pair from its current stagnation.

This week, the dollar is unlikely to develop its recent bullish momentum and breach the ceiling at 148. Concurrently, the yen doesn't have any significant chance to resume its rally in the short term, so the sideways trend will likely persist until the following week.

Increased volatility for the USD/JPY pair is anticipated after the monetary policy meetings of the Federal Reserve and the Bank of Japan.

However, caution is paramount here: if post-meeting momentum favors the dollar, Tokyo might once again voice threats against currency speculation. The risk of intervention would likely deter the greenback from settling at its peak for an extended period, making the 148 mark an elusive target for the USD/JPY pair.