USD/JPY Slumps as Hawkish BoJ Expectations Rise

The USD/JPY currency pair has fallen to a six-month low as expectations of a hawkish Bank of Japan (BoJ) monetary policy have risen. The yen has gained strength due to Japanese authorities' efforts to support the currency, with $96.5 billion spent from July 30 to August 26. This is not the only factor at play, however, as traders are unwinding short yen positions amid expectations that the BoJ will turn more hawkish.

Data released overnight revealed Japan's Q2 GDP was revised higher to an annualised 1.4%, with real wages rising 2.4% year-on-year in July. This suggests the economy has room to absorb higher interest rates, which could be a reality next week if the BoJ hikes rates by 25 basis points as markets are pricing in.

The market is also looking ahead to this week's PPI and CPI data for further clues on the Fed's next move. Worse-than-expected inflation data could lift Fed rate hike expectations, supporting the greenback and putting a floor under USD/JPY.