Ella 
USD/JPY opened on Monday with a subdued performance and consolidated its recent strong gains, reaching its highest level since December 1986 reached last Friday. USD/JPY is currently trading around the 161.00 mark with a mild bullish bias, but the upside seems limited due to market speculation that Japanese authorities are about to intervene to support the currency.
In fact, Japanese Finance Minister Shunichi Suzuki said at a press conference last Friday that excessive volatility in the currency market is undesirable and that the authorities will respond appropriately to such fluctuations. Meanwhile, Japan appointed Jun Mimura as its new top foreign exchange diplomat last Friday. However, the move hardly gave the Japanese yen (JPY) any respite as investors were not clear on Jun Mimura’s stance on monetary policy. This, coupled with the huge interest rate differential between the United States and Japan, is likely to continue to boost USD/JPY.
So far, the Bank of Japan (BoJ) has not provided any signals on the timing of the next rate hike. In contrast, the Federal Reserve (Fed) was more hawkish after its June policy meeting and predicted only one rate cut in 2024. Moreover, the increasing probability of Trump’s election as president has raised concerns about aggressive tariffs in the US, which could fuel inflation and trigger higher interest rates. This in turn has pushed US Treasury yields to multi-week tops and continues to support the US dollar, providing further support to the USD/JPY pair, validating the bullish outlook for USD/JPY.
Meanwhile, the market still sees a high probability of a Fed rate cut in September amid signs of a retreat in inflation. This expectation was reaffirmed by the US PCE price index, which confirmed the deflationary trend reflected in the Consumer Price Index (CPI) and Producer Price Index (PPI) in May. This could curb aggressive bets by US dollar bulls and limit the upside for the USD/JPY pair. The market now looks forward to the release of important US macro data in early July, starting with the ISM Manufacturing Purchasing Managers Index later this Monday, for new trading momentum.
