Japanese Yen Recovers Losses, Trades Flat Against Stronger US Dollar

Japanese Yen Regains Ground, Trades Flat Against Stronger US Dollar

The Japanese Yen (JPY) reversed its early losses on Friday and traded nearly flat against the US Dollar (USD) before the European open, supported by speculation of a Bank of Japan (BoJ) rate hike and optimism over US-Japan trade progress.

Tokyo CPI-Induced Weakness Fades

Initially weighed down by weaker-than-expected Tokyo CPI data, the Yen found support from dip buyers. The headline Tokyo CPI rose 2.9% YoY in July, down from 3.1% in the previous month, suggesting moderating inflation in Japan's capital. While this briefly pressured the JPY, the move was short-lived.

BoJ Rate Hike and Trade Optimism Lend Support

The JPY regained footing amid growing market expectations that the BoJ may raise interest rates later this year, especially as inflation remains above the central bank’s 2% target.

Additionally, optimism over a US-Japan trade agreement has eased some economic uncertainty, providing further tailwinds for the Yen. Trade progress with the US is seen as beneficial for Japan's export-reliant economy and could influence BoJ’s policy decisions going forward.

Related Read: What a US-Japan Trade Deal Means for the Yen

USD Recovers Modestly, Caps Yen Strength

Meanwhile, a modest recovery in the US Dollar Index (DXY) provided some support to the USD/JPY currency pair, preventing the Yen from making a more decisive upside move. Traders are cautious ahead of next week’s BoJ policy meeting, leading to limited aggressive positioning in the pair.

Political Uncertainty and Safe-Haven Demand Balanced

Although domestic political tensions in Japan could weigh on investor sentiment, the JPY remains a traditional safe-haven currency, which benefits during times of global uncertainty. However, Friday’s positive risk tone across broader markets somewhat reduced demand for safe-haven assets.

Key Takeaways

• JPY trades flat vs. USD, paring early session losses.
• BoJ rate hike expectations and US-Japan trade optimism support the Yen.
• Tokyo CPI softens, briefly weighing on the JPY.
• USD/JPY capped by mild USD rebound and pre-BoJ caution.