USD/JPY Surges as Markets Bet on 50-50 Chance of September Hike

USD/JPY traders have been given a boost after Fed Chair Kevin Warsh's speech last Friday, which restored some of the Federal Reserve's inflation-fighting credibility. As a result, markets now price in a 50-50 chance of a September hike, pushing USD/JPY to levels not seen since late July.

The week ahead will be dominated by US labour market data, with non-farm payrolls for August on Friday being the key test of whether the US labour market is as stable as Warsh suggested. Markets have been preconditioned to react to the payrolls figure, but a combination of another soft payrolls report and rising unemployment would raise questions over whether the Fed should be paying greater attention to the maximum employment side of its dual mandate.

History suggests that when the Fed starts hiking after an extended pause following an easing cycle, it has rarely been a one-and-done move. Since 1982, there have been seven instances where the Fed resumed hiking after at least six months after delivering its last cut, and in six of those instances, the first hike was followed by at least one more move.