USD/JPY Volatility Continues as Inflation Data Takes Centre Stage

The USD/JPY pair suffered its largest weekly loss since late July due to dovish remarks from senior Fed officials and possible intervention from the Bank of Japan. However, an unexpectedly strong August payrolls report revived rate hike expectations for the Fed's September meeting.

This week's US calendar is dominated by inflation data releases, with Thursday's PPI and Friday's CPI reports expected to shape market expectations for the core Personal Consumption Expenditures (PCE) index later this month. A strong reading could cement the case for a September rate hike, with current market pricing suggesting a probability of around 66%.

The relationship between USD/JPY and US Treasury yields remains very tight, with movements in the pair closely tracking changes in yields. The upcoming Treasury auctions will also be closely watched, particularly given the recent increase in fiscal concerns. A weak auction or poor budget print could lead to a rise in Treasury yields, potentially benefiting USD/JPY.