Today’s Market Outlook
USD/JPY Recovers Most of Its Post-Jobs-Report Decline; U.S. CPI Is the Next Focus
■ Market Overview
In the Tokyo and Asian sessions at the start of the week, USD/JPY rose from the upper 157 range to the low 158 range, recovering most of the decline triggered by last week’s weak U.S. employment report.
Yen selling remained dominant in the London session, pushing USD/JPY to around 158.89 at one point.
The move reflects several factors: the rebound following the shock of coordinated U.S.-Japan intervention, the structural strength of yen carry trades, and resilient U.S. yields.
Although last week’s U.S. employment report was weak, some market participants noted the improvement in the unemployment rate and the decline in government employment. As a result, the data has not been viewed simply as evidence of a broad deterioration in the U.S. economy.
Attention has already shifted to the U.S. CPI release on the 12th, which is expected to be the next key factor influencing whether the Fed raises rates at the September FOMC meeting.
■ USD/JPY
USD/JPY fell after last Friday’s U.S. employment report but was rapidly bought back at the start of the week.
The pair rose into the low 158 range in Tokyo and extended gains to around 158.89 during the London morning session.
Although it fell into the 155 range following last week’s coordinated U.S.-Japan intervention, the subsequent rebound has been strong, confirming that yen-selling pressure remains deeply entrenched.
The main factors supporting yen weakness are:
● The rebound following the sharp decline caused by coordinated intervention
● Yen carry trades supported by the U.S.-Japan interest-rate differential
● Resilient long-term U.S. yields
● Stable equity markets
● Concerns that higher oil prices will worsen Japan’s terms of trade
However, intervention concerns are likely to intensify again as USD/JPY approaches the upper 158 range and moves toward 159.
The market is testing the upside while watching closely to see how much of a recovery in USD/JPY authorities will tolerate after the intervention.
■ The 159 Range and Intervention Risks
With USD/JPY reaching 158.89, the 159 range is once again coming into view.
The recovery in the yen-weakening direction has already been substantial following last week’s coordinated U.S.-Japan intervention.
The key issue going forward is not simply whether USD/JPY rises above 159, but how quickly it does so.
If the move is gradual, authorities may not intervene immediately. However, if U.S. CPI or another catalyst pushes the pair rapidly toward the upper 159 range and 160, concerns over rate checks or additional intervention could intensify quickly.
If yen weakness returns to previous levels even after coordinated intervention, the market will once again test how much yen depreciation authorities are willing to tolerate.
■ Market Assessment After the U.S. Employment Report
Last Friday’s U.S. employment report was weak on the surface.
However, market interpretation has been divided.
When the improvement in the unemployment rate and the decline in government employment are taken into account, some participants believe that the overall U.S. labor market is not deteriorating rapidly.
As a result, the dollar selling that intensified immediately after the report did not last long, and buying returned at the start of the week.
USD/JPY and yen crosses have recovered most of their post-report losses.
The employment report alone has not been enough to determine the direction of U.S. monetary policy. The next U.S. CPI release has therefore become more important.
■ September FOMC
According to the CME FedWatch Tool, expectations for the September FOMC meeting are nearly evenly split.
Policy rate unchanged: approximately 56%
0.25% rate hike: approximately 44%
Following last week’s U.S. employment report, expectations for a hold have regained a slight advantage.
However, the gap remains narrow.
If CPI on the 12th exceeds market expectations, the probability of a rate hike could rise above 50% again, returning the market to a rate-hike-favored outlook.
Conversely, if CPI falls below expectations, expectations for a September hold could strengthen further and trigger dollar selling.
As Fed Chair Warsh has not provided clear forward guidance, rate-hike expectations are likely to continue changing sharply with each major economic release.
■ U.S. CPI on the 12th
The next major market focus will be the U.S. CPI release on the 12th.
Current market expectations are:
Headline CPI, year-on-year: +3.4%
Previous: +3.5%
Core CPI, year-on-year: +2.5%
Previous: +2.6%
Both measures are expected to show a modest slowdown from the previous month.
If the figures come in as expected, inflation would still be slowing, but not rapidly enough for the Fed to become fully comfortable.
With oil prices remaining elevated, the potential impact of energy prices on inflation is also likely to remain in focus.
A stronger-than-expected CPI result could revive expectations for a September rate hike, leading to higher U.S. yields and dollar buying.
On the other hand, if inflation slows more than expected, USD/JPY could undergo another substantial correction.
■ Middle East Developments
In the Middle East, hopes for easing tensions are competing with concerns over supply disruptions.
U.S. President Trump has suggested that he could declare victory even without a nuclear agreement, providing the market with a degree of reassurance.
However, Iran’s stance remains firm.
Iran has indicated that reopening the Strait of Hormuz would require the United States to lift the blockade and provide compensation.
Reports also suggest that an agreement with Oman concerning the Strait of Hormuz includes fees related to maritime services.
In other words, full normalization of the Strait of Hormuz remains some distance away.
If tensions in the Middle East worsen again, oil prices could surge and safe-haven dollar buying may strengthen.
■ Oil Market
NY crude oil futures remain elevated around $79.
Although prices briefly declined on expectations of improving Middle East conditions, uncertainty surrounding the Strait of Hormuz remains, preventing oil prices from falling significantly.
Higher oil prices raise U.S. inflation concerns and can support long-term U.S. yields.
For Japan, however, they tend to increase import costs and create selling pressure on the yen.
As a result, rising oil prices can support USD/JPY through both dollar buying and yen selling.
Ahead of U.S. CPI on the 12th, it will be important to watch whether crude oil futures return to the $80 range.
■ Yen Crosses
Yen crosses are also rising broadly in the London session.
EUR/JPY climbed to around 183.64, while GBP/JPY reached around 214.43.
The yen buying that followed last Friday’s U.S. employment report has been almost entirely reversed.
In addition to the rise in USD/JPY, European currencies have not fallen sharply against the dollar, supporting gains in yen crosses.
However, yen crosses also face a high risk of sudden reversals in the current post-intervention environment.
If USD/JPY moves from 159 toward 160, yen crosses may rise further. But if additional intervention occurs, they could all fall sharply at the same time.
■ Equity Markets
European equities and U.S. stock futures are mixed.
The broader bullish trend seen through last week remains intact, but aggressive buying at higher levels is limited ahead of U.S. CPI and amid Middle East uncertainty.
Stable equity markets are supporting yen carry trades.
On the other hand, if Middle East tensions worsen and equities fall sharply, risk-averse yen buying could emerge.
At present, U.S. yields and intervention concerns are having a greater influence on USD/JPY than stock-market fluctuations.
■ U.S. Yields
The U.S. 10-year Treasury yield is trading around 4.65%.
Even after last Friday’s U.S. employment report, U.S. yields did not decline significantly and have remained resilient.
This firmness in U.S. yields is supporting the recovery in USD/JPY.
The U.S. CPI release on the 12th will be the most important upcoming catalyst for yields.
If CPI surprises to the upside, the 10-year yield could rise again and push USD/JPY from 159 toward 160.
If slowing inflation becomes clearer, U.S. yields may fall and the USD/JPY rebound could lose momentum.
■ Today’s Key Events
No major U.S., UK, or European economic data releases are scheduled today.
The market is therefore likely to react to:
● Position adjustments ahead of U.S. CPI on the 12th
● News related to Middle East developments
● Movements in NY crude oil futures
● Long-term U.S. yields
● Equity markets
● Comments from U.S. and Japanese authorities regarding additional intervention
With no major data releases, short-term price moves may be especially sensitive to news headlines.
■ Comments From Fed Officials
Late in the New York session, Cleveland Fed President Hammack is scheduled to appear on Yahoo Finance.
The main focus will be how she assesses last week’s U.S. employment report.
Ahead of CPI on the 12th, it will also be important to see how strongly she maintains her concern about inflation.
A hawkish tone could raise expectations for a September rate hike, supporting U.S. yields and the dollar.
Conversely, if she emphasizes the slowdown in employment, rate-hike expectations could decline further.
■ London and New York Session Focus
① Whether USD/JPY can move above 159
② Whether intervention concerns intensify in the 159 range
③ Whether USD/JPY can maintain the 158 range into the New York close
④ Whether the U.S. 10-year yield can rise above 4.65%
⑤ Whether NY crude oil futures can return to the $80 range
⑥ Whether new tensions emerge in the Middle East
⑦ Whether President Hammack signals support for a September rate hike
⑧ How rate-hike probabilities change ahead of U.S. CPI on the 12th
■ Summary
USD/JPY has recovered most of the decline caused by last Friday’s weak U.S. employment report, rising to around 158.89 in the London session.
The recovery has been driven by the rebound after coordinated U.S.-Japan intervention, the continued strength of yen carry trades, and resilient long-term U.S. yields.
Although the U.S. employment report was weak, the market remains divided in its assessment, partly because of the improvement in the unemployment rate. This has prevented broad-based dollar selling.
Market attention has already shifted to U.S. CPI on the 12th.
Current September FOMC expectations are nearly balanced, with a 56% probability of rates remaining unchanged and a 44% probability of a 0.25% rate hike.
If CPI exceeds expectations, rate-hike expectations could regain the upper hand, potentially pushing USD/JPY from 159 toward 160.
If inflation slows more clearly, USD/JPY could correct again alongside lower U.S. yields.
However, if USD/JPY rises toward 159 and 160, concerns over additional intervention are likely to intensify rapidly following the coordinated intervention last week.
From here, the market will watch U.S. yields, oil prices, Middle East developments, and comments from President Hammack, while assessing position adjustments ahead of U.S. CPI on the 12th.
