Ella 
USD/JPY extended this week’s gains and climbed steadily to the psychological 145.00 level in Asia, back to the yearly high hit in June. Its gains, however, lacked bullish confidence as traders remained cautious in the face of expectations of intervention by Japanese authorities.
The yen continued to weaken as the Bank of Japan adopted a more dovish stance, the only central bank in the world to maintain a negative benchmark interest rate. Even recent moves by the Bank of Japan in July to make the yield curve control framework (YCC) more flexible and allow 10-year JGB yields to rise to 1% failed to provide support for the yen. In fact, policy makers emphasized that the policy adjustment is only a technical fine-tuning aimed at extending the duration of stimulus measures.
In addition, weaker domestic wage data this week confirmed market bets that the Bank of Japan will keep interest rates ultra-low for the rest of the year. This is in stark contrast to a more hawkish Fed and should boost USD/JPY. In fact, the market is still pricing in another 25 basis points of Fed rate hikes in 2023, even with Thursday’s weaker-than-expected CPI. The overall CPI annual rate rose from 3% to 3.2% in July, lower than the market consensus.
Elsewhere, core CPI, which strips out volatile food and energy prices, fell to 4.7% from 4.8%, pointing to a sharp drop in underlying price pressures last month. Still, inflation remains well above the Fed’s 2 percent target, supporting the prospect of further rate hikes. This still supports a further rise in U.S. bond yields, leading to a widening of the U.S.-Japan interest rate differential, which is beneficial to USD/JPY bulls. However, a slight drop in the dollar is bearish for the pair.
However, spot prices will still record strong gains this week, and the above fundamentals suggest that the path of least resistance is up. So any subsequent corrective pullback is still seen as a buying opportunity and is more likely to remain capped. Market participants are now focused on U.S. data, including PPI and the University of Michigan consumer index and inflation expectations. The data could affect the dollar and boost USD/JPY.
