USD/JPY Rebound Hinges on Inflation Data as Hawkish BOJ Fades

USD/JPY's violent move lower last week was driven by intervention innuendo and dovish Fed messaging, but strong August payrolls revived September Fed hike expectations.

The pair's rebound will depend on this week's inflation data, particularly the Consumer Price Index (CPI) report on Friday. A strong reading could cement the case for a September rate hike, with market pricing currently sitting just shy of two in three.

A hawkish BOJ repricing has driven a strengthening yen, but Japanese wages and upstream PPI data will be crucial in sustaining this trend. If weak readings emerge, it may push BOJ policymakers towards a more cautious stance on policy tightening.

USD/JPY remains closely linked to US Treasury yields, with the correlation between the pair and 10-year yields sitting at 0.89 over the past five days. The strong positive relationship between USD/JPY and both VIX and MOVE is also notable, contrary to expectations given the yen's status as a funding currency for carry trades.