USD/JPY Hits Seven-Month Low as Traders Await US Inflation and BoJ Rate Hike

The USD/JPY currency pair hit a seven-month low as traders await key economic data from the United States and the Bank of Japan's (BoJ) upcoming interest rate decision. Earlier in the summer, the pair had reached a low of 165, prompting Japanese authorities to intervene in the foreign exchange market. Currently, the appreciation of the yen is driven by expectations of a BoJ rate hike at its September meeting, along with reassessments of US monetary policy.

The BoJ is set to meet on Thursday and Friday, with markets pricing in a high probability of a 25-basis-point increase. US consumer-price data, due on Friday, will provide important insights ahead of the Federal Reserve's meeting on September 15-16. The inflation data is particularly significant because the Fed's policy outlook remains divided between Governor Christopher Waller, who may support maintaining rates if inflation eases, and Fed Chair Kevin Warsh, who argues that insufficient inflation progress could warrant tighter policy.

From a technical standpoint, the weekly chart shows a deterioration in the USD/JPY trend, with the pair breaking below its ascending trend structure and trading beneath the Tenkan-sen and Kijun-sen lines of the Ichimoku Cloud index. This suggests that the medium-term bullish structure has weakened. Furthermore, the RSI has fallen below the neutral 50 threshold and is moving lower, indicating developing bearish momentum.

The fundamental backdrop is becoming increasingly adverse for USD/JPY bulls due to the narrowing interest-rate differential that once supported the yen carry trade. However, the BoJ may adopt more restrictive monetary policy than previously anticipated, reducing the attractiveness of yen-funded carry trades as borrowing costs rise.

This has already prompted investors to reduce yen-short positions. Additionally, the rally has triggered stop-loss orders and algorithmic buying, potentially amplifying the move. The size of the underlying carry trade, which reached around ¥360 trillion (approximately $2.34 trillion) in March, also explains the USD/JPY's sensitivity to further changes in interest-rate expectations.

While the BoJ has prepared markets for higher rates, a rate hike combined with guidance suggesting additional increases could become more surprising than the July 2024 hike. Nonetheless, monetary policy is not the sole factor supporting the yen. The possibility of renewed government intervention remains crucial for traders, especially after recent Tokyo operations.

Japanese Finance Minister Satsuki Katayama has stressed that Tokyo and Washington remain aligned on maintaining orderly foreign exchange markets.