USD/JPY is expected to remain supported this week by higher U.S. interest rates and a stronger dollar, but concern over coordinated Japan-U.S. intervention is likely to cap the upside.
USD/JPY is likely to struggle to rise this week. Higher interest rates, driven by expectations of additional U.S. rate hikes, are expected to persist and favor dollar buying, but strong concern over coordinated Japan-U.S. intervention is likely to keep the pace of gains moderate. Although the U.S. core PCE price index at the end of September came in below market expectations, indicating slower inflation, the revised figure for second-quarter GDP, released at the same time, was revised sharply higher. Market expectations therefore remain focused on the potential for higher interest rates and a stronger dollar. Among this week's U.S. economic indicators, the ISM Services PMI on the 5th will be closely watched, with a favorable reading expected to support the dollar. The University of Michigan Consumer Sentiment Index is expected to decline in September, while inflation expectations and the five-year inflation rate are expected to remain relatively firm.
Following the expression of concern about yen depreciation at the Japan-U.S. summit, concern over coordinated Japan-U.S. intervention has increased, and USD/JPY is expected to face a capped upside. The pair is expected to continue targeting ¥160 in the near term, but gains are likely to be gradual.
The Federal Open Market Committee (FOMC) minutes, due on the 7th, are expected to signal a willingness to raise rates and take additional measures for the first time since June 2023. Their hawkish tone could become a factor supporting dollar buying.