**Credit: Original article by George Smith, Mitrade**
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## USD/JPY Drops Sharply Amid BoJ Policy Speculation and US Data Misses
The foreign exchange landscape has once again delivered surprise volatility as the Japanese yen made robust gains against the US dollar in the latest session, influenced by central bank expectations and weaker-than-anticipated US economic data. In a dramatic reversal, USD/JPY shed nearly two big figures during Asian and early European trading, falling from multi-decade highs. This article delves into the multi-faceted drivers behind this move, examines potential scenarios for the currency pair, and provides a comprehensive outlook for forex traders.
### BoJ Shocks with Shift in Tone Amid Inflation Concerns
Last week, the Bank of Japan (BoJ) refrained from a full normalization of monetary policy but notably warmed to the possibility of a rate hike later this year. Governor Kazuo Ueda’s comments signaled increasing unease over persistent inflation — a rare stance from Japan’s central bank, which has spent much of the past decade combating deflationary pressures.
– **BoJ maintains policy, but signals possible tightening:**
– Announced no immediate change to short-term policy rates.
– Introduced language suggesting assessment of upside risks to inflation.
– BoJ’s statement cited a “provisional” end to massive bond purchases as the economy exhibits more inflation stickiness.
Market participants read between the lines. Ueda’s language was sufficiently assertive to raise expectations that the BoJ will not only refrain from more easing, but may consider a hike as early as October or December, should inflation continue to surprise to the upside.
### US Data Disappoints, Piles Pressure on Dollar
While market focus was initially on Japan, the subsequent release of US economic data provided further impetus for USD/JPY’s reversal. Key indicators painted a less rosy picture of the US economy than many investors anticipated.
– **Key US data points:**
– US services PMI slipped to 51.4, versus expectations for a mild rise.
– Durable goods orders contracted by 0.7 percent month-on-month.
– Core orders (excluding transportation) were flat, missing consensus estimates.
The softer PMI reinforced concerns that US growth is moderating, particularly in the pivotal services sector. The weak durable goods orders added to the narrative of a loss in economic momentum, further diminishing the case for higher-for-longer interest rates from the Federal Reserve.
### The Yield Story: Narrowing US-Japan Differential?
The yield spread narrative remains central to directional moves in USD/JPY. For most of 2024, the pair benefitted from a pronounced divergence between BoJ dovishness and a still-hawkish US Federal Reserve. However, this dynamic now faces scrutiny.
– **Drivers of yield convergence include:**
– BoJ’s shift toward hawkish rhetoric, opening door to higher JGB yields.
– Softening US economic indicators, which may prompt the Fed to ease rhetoric or even consider a cut in coming quarters.
– The resultant narrowing yield spread undermines the strategic bullish dollar-yen premise that has dominated desks for much of the current year.
As JGB yields tick higher and US Treasury yields lose upward momentum, speculative and algorithmic strategies based on rate differentials encounter stress, leading to position unwinding.
### Intervention Watch: The Yen and BoJ’s “Invisible Hand”
Perhaps the most acute source of FX volatility in USD/JPY is the potential for outright intervention from Japanese authorities.
– **Signals and triggers for intervention:**
– Recent jawboning by Japan’s Ministry of Finance, warning speculative shorts not to test official resolve.
– Prior interventions around the 162.00-163.00 levels, with history suggesting similar levels as alert thresholds.
– The scale and velocity of yen moves have not yet matched those witnessed during previous interventions. Still, the specter of coordinated action is enough to cause profit-taking and
Read more on GBP/USD trading.