BoJ Rate Hike Odds Boost Japanese Yen as US Dollar Loses Momentum

The Japanese Yen has made a strong comeback against its major currency peers after underperforming in recent days. Market experts believe that the Bank of Japan (BoJ) will raise interest rates at its September meeting, boosting the yen's value.

Despite weak Q2 flash GDP data showing a slower growth pace than expected, analysts at MUFG and DBS remain confident that the BoJ will hike rates in September. The market odds of a 25bp hike at the next meeting have surged to 81% from 21%, while expectations for a Fed hike have plummeted to 32% from 72%.

The US Dollar (USD) is down 0.25% against the Japanese currency at around 159.20 during the early European trading session. Traders have scaled back hawkish Fed expectations due to weak US data, including soft Nonfarm Payrolls and an expected slowdown in both headline and core Consumer Price Index.

Strategists at DBS observe that investors are positioning for tighter policy in Japan even as the likelihood of further tightening by the Fed is perceived to be diminishing. The combination of weaker US data and BoJ pricing for a hike in September will help to curtail renewed yen selling over the short-term, limiting downside for the Yen.