Japanese Yen struggles despite soft US PPI, fading Fed rate-hike bets

• Japanese Yen struggles despite softer US PPI data and falling Fed rate-hike expectations.
• Higher energy prices keep longer-term inflation risks tilted to the upside.
• BoJ hike expectations and the threat of currency intervention cap USD/JPY near 160.

The Japanese Yen (JPY) struggles to gain traction against the US Dollar (USD) on Thursday, even as the Greenback weakens modestly following softer-than-expected US Producer Price Index (PPI) data. The Yen strengthened immediately after the release, briefly pushing USD/JPY toward 159.

At the time of writing, USD/JPY trades around 159.37. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.90, retreating from 100.08, its highest level in two weeks.

Data from the US Bureau of Labor Statistics showed that the headline PPI was unchanged in July after falling by 0.1% in June, while the annual rate slowed to 4.7% from 5.5%. Core PPI rose by 0.2% month-on-month, easing from 0.4%, while the yearly rate declined to 4.2% from 4.7%.

The latest figures follow Wednesday’s in-line US Consumer Price Index (CPI) report. The run of softer inflation data has prompted traders to scale back expectations for an imminent Federal Reserve (Fed) interest-rate increase, which had already weakened after the July Nonfarm Payrolls (NFP) report surprised to the downside.

According to the CME FedWatch Tool, markets now assign around a 32% probability of a September rate hike, down from 55% a week ago. The repricing is driving a sharper decline in front-end US Treasury yields, but the move is less pronounced at the longer end as higher energy prices keep inflation risks tilted to the upside.

The US Dollar remains supported within its recent range, keeping the Yen under pressure despite growing expectations of a September Bank of Japan (BoJ) rate hike, although the prospect of further currency intervention limits USD/JPY’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, at a minimum, "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 "recent price action highlights that it will be difficult for the BoJ to avoid hiking rates in September and disappointing market expectations," warning that such a scenario "would encourage further yen selling."