Can Upcoming Inflation Data Stop the Yen’s Surge Against the Dollar?

The Japanese Yen is on a winning streak, pulling the USD/JPY currency pair below the key 147.00 psychological level. This recent slide is driven by a surprising tug-of-war between two of the world’s most influential central banks. While strong US economic data might suggest a robust dollar, the currency is facing headwinds from market expectations of a more cautious Federal Reserve, while the Yen gains ground on a subtly hawkish stance from the Bank of Japan.

The US Dollar (USD) finds itself under pressure despite a series of upbeat reports. The American economy’s annualized growth rate for the second quarter was revised upward to a strong 3.3%, and weekly jobless claims remain low, pointing to a resilient labor market. However, these positive signals are being overshadowed by growing concerns over the Federal Reserve’s independence and a market belief that its tightening cycle may be nearing an end. This sentiment, amplified by comments from Chair Jerome Powell, is fueling a retreat for the Greenback.

Across the Pacific, the Japanese Yen (JPY) is capitalizing on the Dollar’s weakness. The Bank of Japan (BoJ), which has long been the outlier with its ultra-loose monetary policy, recently raised its inflation forecasts and adopted a more optimistic tone on the economic outlook. While not a full-blown hawkish pivot, this shift is enough to give the Yen a boost as traders begin to anticipate a potential policy change down the line.

The Data Showdown: US PCE vs. Tokyo CPI
The next move for the USD/JPY pair now hinges on upcoming economic reports. Traders are laser-focused on Friday’s release of the US PCE inflation report—the Fed’s preferred measure of price pressures—and a packed schedule of Japanese data.

In the US, the preliminary PCE price index was revised slightly lower, reinforcing the belief that inflation may be cooling. This Friday’s report will be crucial in confirming that trend. Meanwhile, markets are closely watching Japan’s data, with expectations for headline Tokyo CPI to show a slight slowdown in August. However, the core CPI, which excludes volatile food and energy prices, is expected to remain stubbornly steady, pointing to persistent underlying price pressures.

Ultimately, the direction of USD/JPY will depend on which data set delivers the stronger signal. Will a lower-than-expected US PCE report push the Dollar even lower, or will a sticky Tokyo CPI reading give the Yen a fresh wave of momentum? The coming days will provide the answers.