USD/JPY Tests Key Support as Japan Data and BoJ Rate Hike Loom

The Japanese yen is facing a key support test as it hits its 200-day moving average at 158.34. This comes after private sector growth in Japan reached a six-month high in August, with the composite PMI improving to 53.4 from 52.7 in July.

The Bank of Japan's (BoJ) September rate hike is being priced in by markets, with an 82% chance of a 25bps increase to 1.25%. However, Brown Brothers Harriman's Elias Haddad doubts that the BoJ can tighten more aggressively than currently implied, given contained inflation pressures and flat private consumption activity over Q2.

Meanwhile, the risk of a dovish Fed repricing is skewed towards grinding USD/JPY lower. The US labor market is in balance, with wage growth consistent with the Fed's 2% inflation target, and policy restrictive.