The yen gained as Powell’s dovish speech pulled US yields lower, with Tokyo CPI and labor tightness keeping BoJ normalization risks in play. While domestic data was mixed, sticky services inflation and narrowing US–Japan spreads make carry less appealing. Seasonal repatriation and stretched valuations support yen strength — we stay bearish USD/JPY, favoring dips for gradual appreciation. 

JPY: Another rate hike this year?

The Japanese Yen went through a volatile week of back-and-forth trading, driven almost entirely by the turbulence in the US Dollar and US Treasury yields. With few domestic catalysts, the Yen acted as a classic safe-haven asset early in the week, strengthening as President Trump’s clash with the Federal Reserve soured market sentiment and pushed USD/JPY toward the 147.00 level. This move was short-lived, however, as a mid-week surge in the broad dollar sent the pair to a weekly high above 148.00. In the latter half of the week, the pair retreated from these highs as the dollar weakened again, leaving USD/JPY to settle into a choppy, narrow range. A mix of Japanese data on Friday, including inflation broadly in line with expectations but weaker activity figures, failed to provide direction, leaving the pair to consolidate around its 50-day moving average, following the US-led narrative.

The Yen’s main driver was the sharp swings in the US Dollar. It strengthened on Tuesday when Trump’s attempt to oust Fed Governor Cook spurred a risk-off mood, pushing USD/JPY down from highs near 147.50 to around 147.00. But as the dollar rebounded in the middle of the week, the pair surged past 148.00, tracking the recovery in US Treasury yields. The 50-day moving average, near 147.00, acted as an important technical pivot throughout the week, serving as both support on dips and the central level for the closing range.

Bank of Japan commentary had little effect. Governor Ueda’s remarks on a tight labor market and board member Nakagawa’s comments about a data-dependent approach to rate hikes were seen as repetitive and failed to move the currency. Market pricing remained steady, with expectations for about 17–18 basis points of tightening by year-end, though conviction stayed low.

Friday’s Japanese data releases were mixed and did not shift the narrative. Tokyo CPI for August came in largely as expected, showing that underlying inflation remains elevated. The unemployment rate fell unexpectedly, highlighting ongoing labor market tightness and supporting the BoJ’s stance. However, both industrial production and retail sales for July disappointed forecasts, suggesting a slowdown in activity. Earlier in the week, services PPI declined, though this too had little market impact.

On the trade front, Japan’s trade negotiator Akazawa canceled his planned visit to the US. Reports later suggested the cancellation came amid tensions over US pressure for Japan to increase purchases of American rice.

The yen had a choppy week that was mostly driven by moves in the US dollar and US bond yields. When markets turned risk off early in the week the yen strengthened. When the dollar recovered midweek the yen weakened again. By Friday the pair was back near its 50 day moving average. Local data were mixed. Tokyo inflation was close to expectations and the unemployment rate fell, but industrial production and retail sales missed. Bank of Japan comments did not change the picture and market pricing for only small steps toward policy normalisation was little changed.

A useful extra point here is that the yen has been reacting less to rate moves than it used to. After the end of yield curve control, Japanese government bond yields are allowed to move more freely. That means some macro shocks that once showed up mainly in the currency are now absorbed by the bond market. With lower day to day rate volatility, the link between USD JPY and yield spreads can look weaker for stretches. The yen is still a rate sensitive currency, just not as twitchy to every small move as it was at the peak.

Near term, our bias is Neutral. We expect two way trading with the US side of the story still in control, but with a slightly softer link than before. The yen tends to do better when US yields ease or when investors are more cautious. It tends to stall when the dollar firms. The domestic backdrop helps a little. Services inflation and earlier wage gains keep the BoJ focused on keeping options open rather than easing, which should limit downside as long as those trends hold. We would turn more positive in the short run if Tokyo inflation stays firm, wage growth keeps feeding through, and the currency begins to react less to every move in US yields.

Further out, our bias is Weak Bullish. We look for a slow and steady improvement rather than a sharp move. Three things support this view. First, the mix of inflation in Japan is healthier than in past cycles, with services and wages playing a bigger role, which nudges the BoJ toward gradual normalisation over time. Second, valuation still looks stretched after years of yen weakness, so even small policy steps or steadier global yields can help. Third, the services side of the economy has held up better than manufacturing, which should keep underlying momentum from fading. The yen’s lower sensitivity to yields also means the path higher may be more of a grind than a sprint. This view would soften if services inflation and wages cool in sequence or if the BoJ clearly leans back toward patience. It would strengthen if price and wage readings stay firm and if markets start to pay more attention to Japan’s own data instead of every shift in US yields.

USD: Focus on NFP this week

The US Dollar was volatile in a week dominated by an unprecedented clash between the White House and the Federal Reserve, which overshadowed economic data and strengthened expectations for a September rate cut. The DXY began the week on firm ground, recovering from post-Jackson Hole lows, but the tone shifted on Tuesday when President Trump announced the firing of Fed Governor Lisa Cook. Cook’s refusal to resign and her subsequent lawsuit against the President created significant uncertainty around the Fed’s independence. The dollar sold off sharply as the market priced in a more politically influenced and therefore more dovish central bank. While some data, such as an upward revision to Q2 GDP growth, offered temporary support, the dominant theme was the erosion of the Fed’s credibility. This was reinforced by highly dovish comments from Fed Governor Waller, a leading candidate to become the next Fed Chair, who explicitly backed a September cut. The DXY ended the week near its lows around 97.70, with traders largely ignoring in-line inflation data and focusing instead on a Fed seemingly compelled to ease policy.

The week’s central story was President Trump’s attempt to remove Fed Governor Lisa Cook from the board, citing alleged false mortgage statements. Cook immediately challenged the move as unlawful, refused to resign, and filed a lawsuit against the President. This legal battle has created uncertainty around her FOMC voting rights and is viewed by markets as a direct attack on central bank independence. Reports also emerged that the Trump administration is already considering replacements, including Stephen Miran and David Malpass, and is exploring ways to increase its influence over the Fed’s twelve regional banks.

Meanwhile, Fed Governor Waller gave remarks on Thursday night that added weight to the dovish case. He stated his support for a 25 basis point cut at the September meeting and said he expects additional cuts over the next three to six months, estimating that the current policy rate is 1.25 to 1.50 percent above neutral. As a result, Fed Funds futures pricing for a September rate cut solidified at around a 90 percent probability, with about 55 basis points of total easing expected by the end of the year.

On the economic front, the July PCE report, the Fed’s preferred inflation measure, came in as expected. Headline inflation held steady at 2.6 percent year over year, while core inflation ticked up to 2.9 percent from 2.8 percent. The “supercore” measure, which excludes housing from services, rose 0.4 percent month over month for the third consecutive month, pointing to persistent underlying price pressures. The second estimate of Q2 GDP was revised up to a strong 3.3 percent from 3.0 percent, with corporate profits also revised sharply higher. However, the dollar failed to gain momentum from the release. Activity data was weaker, as the August Chicago PMI dropped to 41.5, the lowest since the pandemic, signaling a sharp contraction in regional business activity. The July Advanced Goods Trade Balance widened significantly to -$103.6 billion as imports surged, creating downside risks for Q3 GDP. The labor market, however, remained resilient, with initial jobless claims holding steady at 229,000.

On the trade and geopolitical side, the administration doubled tariffs on most Indian imports to 50 percent, citing India’s continued purchases of Russian oil. President Trump also threatened substantial additional tariffs on countries imposing digital services taxes on US technology firms. The administration permanently eliminated the longstanding de minimis rule that allowed packages valued under $800 to enter the US duty-free, a move that tightens trade policy for small-parcel e-commerce imports from all countries. Meanwhile, China’s Ministry of Commerce confirmed that a trade negotiator would visit Washington, although these meetings are considered deputy-level and not part of formal negotiations.

Market sentiment was dominated by concerns about Fed independence, overshadowing the economic data. The dollar weakened while the Treasury yield curve steepened, with short-term yields falling on expectations of imminent rate cuts, while long-term yields remained firm on concerns that a politically compromised Fed would tolerate higher inflation. Toward the end of the week, some of the choppy price action was also attributed to month-end rebalancing flows, with models pointing to mild US dollar selling.

Near term, we stay weak bearish on the dollar. The attempted removal of Governor Lisa Cook and her lawsuit have raised the perceived risk to Fed independence, reinforcing expectations for policy easing and making haven pops feel shorter-lived. Governor Waller then openly backed a September cut and signaled more over the next 3–6 months, which keeps front-end yields heavy and rallies prone to fade. In data, July PCE was broadly in line while the Chicago PMI slumped, and the goods trade gap widened, none of which challenges the easing narrative. We’d sell strength unless incoming labor, inflation or PMI’s materially lower September cut odds.

Longer term, we still see a gradual USD softening as U.S. rate differentials compress and “U.S. exceptionalism” cools. Trade policy shifts add a wrinkle, ending the de minimis exemption and steep new tariffs on India are inflationary at the margin but growth-negative. Taken together, markets are reading them as front-end dovish and curve-steepening, which fits a “sell the rallies” USD regime unless inflation proves stickier than we expect. We’ll stay tactically flexible, but structurally biased to a weaker dollar while headline risk around Fed governance and trade keeps volatility high.