Japanese Yen reverses earlier gains as US Dollar firms after PCE data

• USD/JPY rebounds as the US Dollar Index climbs after the US PCE release.
• Headline PCE exceeds forecasts, while core inflation matches expectations.
• The Yen receives little support from BoJ hike bets as fiscal worries dominate.

The Japanese Yen (JPY) gives up its earlier gains against the US Dollar (USD) on Wednesday as traders react to the latest United States (US) inflation data. At the time of writing, USD/JPY trades around 159.41, recovering from an intraday low of 158.88.

The headline Personal Consumption Expenditures (PCE) Price Index rose 0.2% MoM in July, above the 0.1% forecast and reversing the 0.1% decline recorded in June. On an annual basis, headline inflation held steady at 3.7%, above market expectations of 3.6%.

Meanwhile, the core PCE Price Index, the Federal Reserve’s (Fed) preferred measure of underlying inflation, increased 0.2% MoM, matching forecasts but accelerating from June’s 0.1% rise. Annual core inflation stayed unchanged at 3.3%, also in line with expectations.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 99.17, up roughly 0.25% on the day.

According to the CME FedWatch Tool, markets see a 65% chance that the US central bank will leave interest rates unchanged in September. Attention now turns to Fed Chair Kevin Warsh’s speech at the Jackson Hole Symposium on Friday for fresh guidance on the policy outlook.

In contrast, the Bank of Japan (BoJ) is widely expected to raise interest rates at its September meeting. A Reuters poll released on Wednesday showed that 57% of economists expect the central bank to lift its policy rate from 1.00% to 1.25%, up sharply from only 5% in the previous month’s survey.

Even so, BoJ rate-hike expectations are offering limited support to the Japanese Yen as concerns over Japan’s fiscal outlook dominate market sentiment. These worries have also limited the lasting impact of the recent joint Yen-buying intervention by Japan and the United States, with USD/JPY drifting back toward the 160 psychological mark.

Rabobank’s FX strategists note that the policy backdrop in Japan has shifted, with “the government has now indicated that it is supportive of tighter monetary policy.” However, they caution that this alone is unlikely to deliver a sustained recovery in the Yen. In their view, “for the JPY to strengthen, the market will likely need clear evidence of a more proactive stance from the BoJ in addition to reassurances about JGB supply,” while “fiscal concerns are set to persist at least until 2027 budget negotiations are underway later in the year, and potentially well beyond.”