USD/JPY Returns to Fundamental Drivers After Coordinated Currency Intervention

The recent coordinated currency intervention by the US and Japan has unexpectedly brought the USD/JPY back to its fundamental drivers. The pair's movements now rely less on speculative positioning and more on the monetary policies of the Fed and the BoJ.

Market sentiment has shifted since the intervention, with investors scaling back expectations for Fed tightening and no longer anticipating a rate hike in September. In contrast, the probability of the BoJ raising its policy rate from 1% to 1.25% in early autumn is above 80%. Rising energy prices are also weighing on the Japanese economy.

The intervention has set the process in motion for speculators to unwind their short yen positions. Although it may seem like a direct consequence of the currency intervention, this is not entirely accurate. In previous instances, USD/JPY bulls returned within a couple of weeks, but that has not happened yet.