Japanese Yen sticks to gains amid hawkish BoJ bets as USD stays weak on Fed expectations

The USD/JPY currency pair has struggled to capitalize on the previous day's recovery from the 158.00 mark, marking a low point for a one-and-a-half-week period. The pair closed with modest intraday losses around the 158.60 level, making it likely to end the trading session in the red for the first time in three weeks. The Japanese Yen experienced a slight boost after domestic data revealed that core consumer inflation surged in July, supporting the likelihood of an interest rate hike by the Bank of Japan (BoJ).

The core Consumer Price Index (CPI), excluding volatile fresh food items, increased by 1.8% year-over-year in July, a notable improvement from the 1.6% advance in the previous month and the fastest pace since January. Additionally, an index that excludes both volatile food and fuel prices, which is closely monitored by the BoJ as a clearer measure of underlying inflation, grew by 1.9% compared to a year earlier, following a 1.7% rise in June.

These factors, coupled with the prevailing selling bias towards the US Dollar (USD), exert downward pressure on the USD/JPY pair. Currently, the USD Index (DXY), which gauges the Greenback against a basket of currencies, is languishing near its lowest level since May 14, as traders scale back expectations of an immediate interest rate increase by the US Federal Reserve (Fed).

However, market sentiment remains positive about a 68% probability of the US central bank raising borrowing costs by the end of the year, considering inflation risks triggered by higher oil prices. Geopolitical uncertainties and concerns over Japan's deteriorating fiscal situation further bolster the USD and the USD/JPY pair. With the widening US-Japan interest rate gap and growing fears about Japan's fiscal predicament, JPY bulls may hesitate to make significant bets.

Traders are advised to wait for robust selling confirmation before concluding that the recent recovery from the 155.25-155.20 level, the lowest since May, could be losing momentum. The market now anticipates flash US PMI releases to provide some impetus, while upcoming developments related to the Middle East crisis could also generate short-term trading opportunities around the USD/JPY pair.