Dollar Firms as US Inflation Data Dampens Japanese Yen Gains

The Japanese Yen (JPY) gave up its earlier gains against the US Dollar (USD) after the release of the latest United States inflation data. The Personal Consumption Expenditures (PCE) Price Index rose 0.2% MoM in July, exceeding expectations and reversing the 0.1% decline recorded in June.

The core PCE Price Index, the Federal Reserve's preferred measure of underlying inflation, also increased 0.2% MoM, matching forecasts but accelerating from June's 0.1% rise. Annual core inflation remained unchanged at 3.3%, aligning with market expectations.

As a result, the US Dollar Index (DXY) rose to around 99.17, up roughly 0.25% on the day. Meanwhile, the Bank of Japan (BoJ) is widely expected to raise interest rates at its September meeting, with economists polled by Reuters predicting a 57% chance of a rate hike.

However, BoJ rate-hike expectations are offering limited support to the Japanese Yen as concerns over Japan's fiscal outlook dominate market sentiment. The government has indicated that it is supportive of tighter monetary policy, but this alone may not deliver a sustained recovery in the Yen, according to Rabobank's FX strategists.