Japanese Yen slides to two-week low, seems vulnerable as USD stands firm ahead of US CPI

The Japanese Yen (JPY) has experienced a decline to a two-week low as the US Dollar (USD) maintains its strength ahead of the upcoming US Consumer Price Index (CPI) report. The USD/JPY pair reached a one-and-a-half-week high earlier in the week, but this momentum has largely faded due to the significant rate gap between Japan and other major economies, keeping the carry trade active and weakening the JPY.

Prime Minister Sanae Takaichi's aggressive economic stimulus and tax cuts have raised concerns about Japan's worsening fiscal condition, adding to the pressure on the JPY. Meanwhile, the Reuters Tankan survey revealed that Japanese manufacturers' sentiment index increased from 13 to 18 in August, the highest level since March 2026, while the non-manufacturer's gauge rose to 28 from 25 in July.

Traders are increasingly pricing in the possibility of another Bank of Japan (BoJ) rate hike, with a 66% chance of a move in September, but this does not seem to boost JPY bulls or challenge the prevailing bullish sentiment for the USD/JPY pair. The US Dollar (USD) is expected to capitalize on the week's gains, as higher oil prices may reignite inflationary pressures and prompt the US Federal Reserve (Fed) to adopt a more hawkish stance.

The CME Group's FedWatch Tool indicates a greater than 75% chance of a US central bank rate hike by the end of 2026, supporting elevated US Treasury bond yields and the USD/JPY pair. However, traders remain cautious ahead of the key US CPI report, scheduled for later today, as well as the US Producer Price Index (PPI) release on Thursday, which will influence market expectations about future Fed policy.

The JPY is currently below the 50.0% Fibonacci retracement level of the recent slump, with the next support levels at the 38.2% retracement (158.58) and 23.6% level (157.31). A deeper decline could expose the structural support near 155.26.