Yen Slump Tests Markets as Fed Rate Hike Odds Even Up

Japan's currency, the yen, is under pressure near four-decade lows due to higher fuel-import costs amid an energy shock. To support the currency, there has been a rare joint U.S.-Japan intervention, along with U.S. Treasury Secretary Scott Bessent's reported focus on yen purchases. However, traders are watching for signs that the Bank of Japan could raise rates in September.

The use of euros instead of dollars in the intervention has raised questions about Treasury market stability and the dollar's reserve-currency role. In other news, investors are monitoring negotiations between Iran and Oman for a possible interim arrangement aimed at ensuring safe passage through the Strait of Hormuz. However, expectations for a lasting agreement remain limited after months of conflict.

More pressing for markets is the upcoming U.S. consumer price data due on Wednesday, which will be a key test for markets as expectations grow that the Federal Reserve could raise interest rates in September. Reuters-polled economists expect July CPI inflation at 3.4% year-on-year, while core CPI is forecast at 2.5%. Producer price data due Thursday and retail sales figures on August 14 will provide further clues on inflation and consumer strength.

Markets are currently pricing roughly even odds of a September Fed hike. In Australia and Norway, central banks are expected to keep interest rates unchanged this week as policymakers assess whether previous tightening has sufficiently cooled inflation. The Reserve Bank of Australia meets Tuesday after delivering three rate hikes this year, while softer consumer inflation has reduced pressure for another immediate increase.