Yen steadies as intervention boost fades ahead of US data

The Japanese yen steadied on Tuesday following a significant drop in the previous session, as the US-Japan intervention proved ineffective in sustaining gains. The currency strengthened to 158.93 per US dollar in Asian hours, but had not yet reached the three-month high of 155.20 reached last week after the rare currency-buying intervention by the US and Japan in late July.

Although the intervention aimed to counter the yen's 40-year low of 163.99 per dollar, it had already erased nearly half of the gains, prompting speculation that authorities would eventually intervene in the currency market again. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that the market was testing the resolve of Japanese and US officials.

Trading activity was notably thin, with Japanese markets closed for a holiday. Speculators had reduced their bearish bets on the yen by the most in over 12 years, with the net short position falling by $8.865 billion to $3.604 billion in the week ending August 4, according to data from a US regulator. However, analysts anticipate that speculators will likely rebuild their short positions, as in previous intervention episodes.

ING strategists suggested that the path could remain uncertain, with a move back to 160.0 at some point this month remaining a risk, even if September sees both a Bank of Japan rate hike and a pause from the US Federal Reserve. The probability of a Bank of Japan rate hike was priced at just over 50%, according to LSEG data. The Bank of Japan's tightening trajectory was also influenced by mounting political pressure to support the bond market.

Inflation concerns were a key focus for the RBA, with the focus on policymakers' comments during the policy decision. The Australian dollar traded at US$0.7057, while traders await the RBA's decision on the potential continuation of rate hikes. The ongoing Middle East conflict may lead to further cost pass-through to consumer prices in Q3 2026.

However, softer inflation and the weak housing market provide the RBA with some room to assess the long-term effects of previous tightening measures. Meanwhile, the US dollar remained stable against major currencies as oil prices stayed near one-week highs, due to dwindling hopes of a deal between the US and Iran to resolve the ongoing conflict.

The euro was priced at US$1.1544, and the British pound was at US$1.3509 in Asian hours. Expectations are also high for Wednesday's US consumer price index data, which could shed light on the impact of the war on pricing pressures, in addition to Thursday's producer price data and Friday's retail sales figures, offering further insights into the trajectory of inflation.