USD/JPY Struggles Amid Cautious Market Sentiment Ahead of Key Central Bank Speeches

The USD/JPY currency pair faces challenges in defending its mid-week recovery from a recent fortnight-low, retreating to 145.90 in the early hours of Friday morning in Europe. This movement reflects the prevailing cautious sentiment within the market, which awaits the speeches from leaders of both the Bank of Japan (BoJ) and the Federal Reserve (Fed) at the annual Jackson Hole Symposium.

Moreover, discussions surrounding the BoJ’s potential adjustments to the Yield Curve Control (YCC) policy, which could prompt increased budgetary allocations and impact inflation, exert supplementary downward pressure on the USD/JPY pair.

Notably, recent events have further shaped the currency pair’s trajectory. The encouraging data on the US Durable Goods Orders for July, as well as robust mid-tier activity indicators and employment signals, have maintained a hawkish stance among Fed policymakers, influencing market sentiment negatively. Notably, James Bullard, former St. Louis Federal Reserve President, underscored the US Dollar’s strength with his hawkish comments. Bullard stated in an interview with Bloomberg, “The reacceleration could put upward pressure on inflation and thus makes it impossible for the Fed to start cutting rates anytime soon.” In contrast, Federal Reserve Bank of Philadelphia President Patrick Harker hinted at a potential end to the rate hike trajectory, while Boston Federal Reserve President Susan Collins defended a “higher for longer” bias in rates.

Parallelly, the waning optimism regarding US-China relations has impacted market dynamics. The Chinese Commerce Ministry’s statement emphasized China’s stance on economic and trade matters, while urging financial institutions to extend credit to businesses. Additionally, China called for the cancellation of potential arms sales to Taiwan, raising concerns about geopolitical tensions, particularly as US Commerce Secretary Gina Raimondo is set to visit Beijing next week.

In this context, S&P 500 Futures remain subdued at around 4,385 following a considerable drop the previous day, and the US 10-year Treasury bond yields have reversed their earlier decline to stand at 4.25%, a two basis point increase from the recent pullback. Simultaneously, the US Dollar Index (DXY) has reached an 11-week high, providing support to the USD/JPY price.

Anticipating upcoming developments, the market’s attention is centered on Fed Chair Powell’s speech, given its potential impact on USD/JPY traders. Additionally, BoJ Governor Kazuo Ueda’s address on Saturday holds significance. As such, a divergence between the two central banks’ policy outlooks will be crucial to monitor closely.