Yen falls to 137 as US dollar shines

The Japanese yen is drifting at the start of the week. In the European session, USD/JPY is trading at the 137 line.

The US dollar flexed some muscles last week, posting strong gains against the major currencies. USD/JPY climbed an impressive 2.54%, as the yen finds itself at 3-week lows.

BoJ Core CPI next

Japanese inflation continues to accelerate. The pace of inflation is subdued compared to other major economies, such as the UK where inflation has pushed above 10%. Still, Japan is unaccustomed to dealing with prices going up, having grappled with deflation for many years. The war in Ukraine has triggered a massive rise in the prices of oil and wheat, and Japan has been hit by higher energy and food prices. In July, Japan’s core inflation rose to 2.4%, up from 2.2% in June. This marked the highest level since 2008 and was the fourth where inflation exceeded the Bank of Japan’s target of 2%. The weakening yen is also contributing to inflation. On Tuesday, the BoJ publishes its preferred inflation indicator, BoJ Core CPI, with a forecast of 1.5% in July, after a 1.6% gain in June.

The Bank of Japan has no plans to tighten policy, despite inflation moving higher. The BoJ’s number one priority is to stimulate weak growth through a loose monetary policy, unlike other major central banks that are tightening policy in order to curb inflation. Governor Kuroda has argued that inflation is not broad-based but is being driven by rising import costs due to high commodity prices. If wages show strong growth or inflation tops 3%, the BoJ may have to reconsider its policy, but until then, it will be business as usual.

Central bankers will converge on Wyoming later this week for the Jackson Hole Symposium. The conference is often the platform for significant announcements which could have a major impact on the financial markets. July’s US inflation report fuelled speculation that the Fed would U-turn its aggressive policy, and the message from Fed officials that it planned to remain hawkish was largely brushed off by the markets. Fed Chair Powell is expected to repeat this message, but will the markets be listening?

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USD/JPY Technical

• There is resistance at 1.3744 and 139.30
• 135.46 has switched to support, followed by 1.3350

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