USD/JPY Surges as Robust US Data Bolsters Dollar

The USD/JPY currency pair rebounded sharply from a three-week low on Thursday, gaining over 150 pips after strong US economic data bolstered the US Dollar. The pair, which earlier dipped to around 146.22, surged to approximately 147.90 by the close of the American session, marking a 0.35% increase. This rally snapped a two-day winning streak for the Japanese Yen, driven by unexpectedly robust US Producer Price Index (PPI) figures and steady labor market data.

July’s US PPI data revealed a significant uptick in inflation, with the headline rate climbing 0.9% month-over-month—the largest increase since June 2022—pushing the annual rate to 3.3%. The core PPI, excluding volatile components, also rose 0.9% month-over-month, lifting the yearly rate to 3.7%, both surpassing forecasts. Additionally, Initial Jobless Claims dropped to 224,000, beating expectations, while Continuing Claims fell to 1.953 million. These figures strengthened the US Dollar Index (DXY), which tracks the dollar against six major currencies, pushing it above 98.00 after a recent two-week low. The data dampened expectations for aggressive Federal Reserve rate cuts, signaling a cautious approach to monetary policy easing.

Meanwhile, the Bank of Japan (BoJ) faces growing pressure to reconsider its focus on “underlying” inflation metrics, which emphasize demand and wage growth, as Japan’s headline Consumer Price Index (CPI) remained elevated at 3.3% in June, well above the BoJ’s 2% target. Critics argue this approach may underestimate persistent inflationary pressures, fueling speculation of a potential rate hike as early as October if inflation and wage growth remain strong.

Looking ahead, key economic releases on Friday will draw attention from both Japan and the US. Japan’s preliminary Q2 GDP is expected to show a modest 0.1% quarter-over-quarter expansion, improving from the prior quarter’s stagnation, with the annualized rate projected to rise to 0.4% from a 0.2% contraction.

The GDP deflator is anticipated to ease slightly to 3.1% year-over-year from 3.3%. In the US, July Retail Sales are forecast to increase by 0.5% month-over-month, following a 0.6% rise in June, while Industrial Production is expected to remain flat after a 0.3% gain.

The preliminary University of Michigan Consumer Sentiment survey for August is projected to edge up to 62.0 from 61.7, though the Consumer Expectations Index may slip to 56.5 from 57.7. These reports will likely influence market expectations for both the Federal Reserve and the Bank of Japan’s future policy decisions.