USD/JPY Defies Expectations as BOJ Hike Talk Fails to Bite

The USD/JPY pair has continued its upward trend despite softer US economic data and speculation that the Bank of Japan could hike interest rates earlier than expected.

Recent trends have questioned the narrative of US economic exceptionalism, with US data surprises retracing to levels not seen since early May. Meanwhile, Japanese data surprises remain positive against historical norms.

The threat of intervention has not been enough to move the dial for the yen, nor has the sharp decline in Fed hike pricing provided a headwind for USD/JPY.

Markets have pared back their expectations for Fed hikes out to June next year, falling from over 64 basis points of tightening in late July to just 36 basis points. This suggests that even faster BOJ hikes may not be enough to fundamentally alter the upward trend in USD/JPY unless they out-hawk market expectations.

The pair remains sensitive to Treasury yields and has shown a strong positive relationship with short and longer-dated US yields over the past week. The relationship with Fed pricing also remains moderately strong, but markets are not yet pricing in significant changes from the BOJ.