Yen Struggles Despite Soft US Inflation, Rate-Hike Bets Repriced

The Japanese Yen (JPY) is struggling to gain traction against the US Dollar (USD) despite softer-than-expected US Producer Price Index (PPI) data. The weaker inflation numbers have caused traders to scale back expectations for a Federal Reserve interest-rate increase, with the CME FedWatch Tool now assigning around a 32% probability of a September rate hike, down from 55% a week ago.

The US Dollar Index (DXY) has retreated from its highest level in two weeks, trading around 99.90. The USD/JPY pair is currently at 159.37, with the Yen briefly pushing against the Greenback after the PPI release. However, the prospect of further currency intervention by the Bank of Japan (BoJ) is limiting the pair's upside near 160.00.

Analysts at MUFG note that market participants are increasingly focused on whether Japan is prepared to re-enter the FX market to shore up the Yen. They argue that Japanese policymakers will be hoping the heightened threat of intervention helps to slow the pace of yen weakness, even if actual action is delayed. MUFG also stresses that it will be difficult for the BoJ to avoid hiking rates in September and disappointing market expectations, which would encourage further yen selling.