USD/JPY Hinges on Inflation Data as Rate Hike Bets Rebound

Last week, the USD/JPY pair saw its largest weekly loss since late July due to suspected intervention from the Bank of Japan and dovish remarks from senior Fed officials.

However, a strong August payrolls report in the US revived expectations for a September rate hike by the Federal Reserve, which helped stall the downward move in USD/JPY.

This week's inflation data, particularly the Consumer Price Index (CPI) and Producer Price Index (PPI), will be crucial in determining whether the rebound in USD/JPY continues. A strong reading could cement the case for a September rate hike, while a weak reading would likely ratchet down market pricing for a September hike.

The correlation between USD/JPY and US Treasury yields remains strong, with a 0.80 correlation with the US 2-year yield over the past five days. This suggests that any move in US Treasury yields will have a significant impact on USD/JPY.