Japanese Yen struggles as impact of joint intervention fades

• USD/JPY holds steady as a firmer US Dollar and elevated Oil prices weigh on the Japanese Yen.
• The Yen struggles to build on recent intervention-driven gains despite signs that the BoJ could raise rates again in September.
• Traders await US CPI data for fresh clues on the Fed’s next move.

USD/JPY treads water on Tuesday as the Japanese Yen (JPY) struggles to find its footing, facing headwinds from a firmer US Dollar (USD) and elevated Oil prices. At the time of writing, the pair trades around 159.24 after hitting an intraday low of 158.92.

Plans to reopen the Strait of Hormuz remain uncertain, even as talks between Iran and Oman have moved to an advanced stage, according to Qatar’s Foreign Ministry spokesperson. Earlier, Iran outlined several demands from the US, including lifting sanctions, releasing frozen Iranian assets, ending military threats and removing the naval blockade.

Higher Oil prices are raising concerns about the US inflation outlook and supporting expectations that the Federal Reserve (Fed) may need to raise interest rates. The CME FedWatch tool shows a 51.9% chance of a rate hike at the September meeting.

Hawkish Fed expectations and geopolitical tensions are helping the US Dollar hold near its recent lows. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, trades around 99.85.

On the data front, the ADP Employment Change four-week average fell to 8.25K from 15K. Traders now await Wednesday’s US Consumer Price Index (CPI) data.

Meanwhile, elevated Oil prices are likely to keep the Japanese Yen under pressure in the near term, given Japan’s heavy dependence on imported energy.

Yen support from joint intervention fades as BoJ hints at further rate hike

Rabobank’s strategists observe that “the joint Japanese-US intervention in the JPY exchange rate is starting to lose its grip on the currency.” While “the prospect of further FX interventions continues to provide some support,” they point out that “USD/JPY is gradually drifting higher, and the currency has reversed about half of the peak-to-trough move versus both EUR and USD.”

Rabobank reiterates that “these FX interventions may prop up the currency temporarily, but it will probably not last unless there are structural improvements in the yen’s fundamentals,” adding that “the government’s plans are unlikely to do this in the near-term.”

In addition, Rabobank highlights that “interest rate differentials are also weighing on the currency,” even as the BoJ begins to signal a willingness to address this. The bank notes that “sources within the Bank of Japan told reporters that policymakers could raise rates again in September,” comments which “follow a relatively hawkish write-up of the July meeting.”