USD/JPY moves back above 146.00 after softer Tokyo inflation, focus remains on Fed's Powell

• USD/JPY scales higher for the second straight day and is supported by a combination of factors.
• A softer Tokyo CPI print reaffirms the BoJ's dovish stance and continues to undermine the JPY.
• The USD climbs to over a two-month high and further acts as a tailwind ahead of Fed's Powell.

The USD/JPY pair builds on the previous day's strong move up from the vicinity of mid-144.00s and gains some follow-through positive traction for the second successive day on Friday. The momentum lifts spot prices back above the 146.00 round-figure mark during the Asian session, setting the stage for a further appreciating move towards challenging the YTD peak touched last week.

The Japanese Yen (JPY) continues to be weighed down by receding fears of an imminent intervention by authorities and a more dovish stance adopted by the Bank of Japan (BoJ). It is worth recalling that Atsushi Takeuchi, who was head of the BoJ's foreign exchange division in 2010-2012, said earlier this week that Japan will forgo intervening in the market unless the Yen plunges past 150 against its American counterpart. Furthermore, the BoJ is the only central bank in the world to maintain negative rates. Moreover, policymakers have emphasised that a sustainable pay hike is a prerequisite to consider dismantling the massive monetary stimulus.

Adding to this, data released on Friday showed that consumer inflation in Tokyo – Japan’s capital city – grew at a slower-than-expected pace in August. In fact, the Statistics Bureau reported that the headline Tokyo CPI eased to the 2.9% YoY rate in August from 3.2% prior, though the core figure, which excludes both fresh food and energy costs, remained at 4% – its highest level in over 40 years. Nevertheless, the data reaffirms that the BoJ will stick to its ultra-lose monetary policy settings. In contrast, the overnight hawkish remarks by several Federal Reserve (Fed) officials kept the door wide open for one more 25 bps rate hike by the end of this year.

Boston Fed President Susan Collins said that the Fed may be at a place to hold rates steady, though noted that more rate hikes are possible and that it is premature to signal the timing of rate cuts. Separately, Philadelphia Fed President Patrick Harker stated that the central bank must keep its restrictive stance and added that inflation needs to fall further to pave the way for any rate cuts. This remains supportive of elevated US Treasury bond yields, which lifts the US Dollar (USD) to its highest level since early July and further lends support to the USD/JPY pair. Bulls, however, could take a brief pause ahead of Fed Chair Jerome Powell's speech at the Jackson Hole Symposium.

Investors will look for fresh cues about the Fed's future rate-hike path, which will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. Nevertheless, spot prices remain on track to register gains for the fourth straight week, also marking the fifth week of a positive move in the previous seven. Moreover, the fundamental backdrop still seems tilted firmly in favour of bullish traders and suggests that the path of least resistance for the major is to the upside.

Technical levels to watch