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

The USD/JPY pair struggles to capitalize on the previous day's recovery from the 158.00 mark, or a one-and-a-half-week low, and meets with fresh supply on Friday. Spot prices stick to modest intraday losses around the 158.60 area through the first half of the European session and remain on track to end in the red for the first time in three weeks.

The Japanese Yen (JPY) gets a minor lift after domestic data showed that core consumer inflation accelerated during July, bolstering the case for an interest rate hike by the Bank of Japan (BoJ). In fact, the core Consumer Price Index (CPI), excluding fresh food items, rose 1.8% YoY in July, up from a 1.6% advance in the previous month and marking the fastest pace since January. Adding to this, an index that strips out both volatile fresh food and fuel prices, which is closely watched by the BoJ as a clearer ‌gauge of underlying inflation, rose 1.9% from a year earlier after a 1.7% gain in June. This, along with the prevailing US Dollar (USD) selling bias, exerts some downward pressure on the USD/JPY pair.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near its lowest level since May 14 as traders have been trimming their bets for an immediate interest rate hike by the US Federal Reserve (Fed). However, markets are still assigning around a 68% chance that the US central bank will raise borrowing costs by the end of this year amid inflation risks stemming from higher oil prices. Moreover, minutes from the July 28-29 FOMC meeting revealed on Wednesday that officials indicated the need to raise interest rates soon unless there was more progress on bringing down inflation. This, along with geopolitical uncertainties, supports the USD and the USD/JPY pair.

Furthermore, the wide US-Japan interest rate gap and growing concerns about Japan's worsening fiscal condition might hold back JPY bulls from placing aggressive bets. Hence, it will be prudent to wait for strong follow-through selling before confirming that the recent goodish recovery from the 155.25-155.20 area, or the lowest since May, touched earlier this month, has run out of steam and positioning for further losses. Traders now look forward to the release of flash US PMIs for some impetus, while further developments surrounding the Middle East crisis might also contribute to producing short-term trading opportunities around the USD/JPY pair.