Warsh's Speech Sparks USD/JPY Rally as Labour Market Data Looms

USD/JPY has awakened from its slumber after Fed Chair Kevin Warsh's speech last Friday restored some of the Fed's inflation-fighting credibility.

The sharp increase in pricing for a September Fed rate hike has pushed USD/JPY to levels not seen since July, with five-day realised volatility falling to the 12th-lowest reading since 2000 and average daily candle bodies sitting in the bottom 2.2% of rankings over the same period.

However, the week ahead will be dominated by US labour market data, with non-farm payrolls for August on Friday serving as a key test of whether the latest hawkish repricing sticks or sinks.

The data carry the potential to bring the maximum employment side of the mandate back to the attention of the Fed and markets, potentially challenging the hawkish repricing seen since Warsh's speech.

History suggests that once the Fed starts hiking, it rarely stops at one move, with six out of seven comparable episodes since 1982 seeing at least one more hike after the first one.