Yen steadies as intervention boost fades ahead of US data

The Japanese yen showed signs of stability on Tuesday, following a significant decline the previous day. This stability occurred after a US-Japan intervention aimed at boosting the currency failed to produce lasting results. Meanwhile, the Australian dollar reached an eight-week high ahead of a central bank decision. The yen rose to 158.93 per US dollar in Asian trading hours, but it remained below the three-month high of 155.20 set last week, following the rare joint intervention by the US and Japan in July.

The joint effort aimed at currency intervention followed the yen reaching a 40-year low of 163.99 per dollar, but traders have since erased nearly half of the gains, sparking speculation about when authorities would intervene in the currency market again. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that the market is testing the resolve of Japanese and US officials.

Japanese markets were closed for a holiday, contributing to thinner-than-usual trading volumes. Speculators had cut their bearish bets on the Japanese yen by the most in over a decade, with the net short position falling by US$8.865 billion to US$3.604 billion in the week leading up to August 4. However, analysts suspect that speculators will quickly rebuild their short positions, given the pattern observed in previous intervention episodes.

ING strategists warned that the path ahead may remain uncertain, with a move back to 160.0 remaining a tangible risk even if September concludes with both a Bank of Japan rate hike and a pause from the US Federal Reserve. Traders currently price the likelihood of a Bank of Japan rate hike at just over 50%, according to LSEG data.

The Bank of Japan's tightening trajectory is further complicated by mounting political pressure to support the bond market. Investor focus later in the day will be on the Reserve Bank of Australia's policy decision, where expectations are for the RBA to keep interest rates unchanged, with analysts keen on the policymakers' remarks.

The Australian dollar held steady at US$0.7057. The RBA is likely to stress that inflation remains elevated and is prepared to raise the cash rate again if necessary. The ongoing Middle East conflict might further pass costs onto consumers in the third quarter of 2026. However, softer inflation and a weakening housing market could give the RBA room to assess the long-term impact of earlier tightening measures.

The US dollar remained steady against major currencies as oil prices hovered near one-week highs, amid fading hopes for a US-Iran deal to end the conflict. The euro was trading at US$1.1544, while the British pound was at US$1.3509 in Asian trading hours. Greater attention will also be directed towards Wednesday's US consumer price index data, which could reveal the impact of the war on pricing pressures.

Additionally, Thursday's producer price data and Friday's retail sales figures will provide further insights into the trajectory of inflation.