Could another BoJ rate hike be in the works? USD/JPY, GBP/JPY, EUR/JPY pullback continues

The Japanese Yen has been attracting increased buying interest over the past few weeks. What started with a pullback in USD/JPY following softer-than-expected inflation data released on July 11 has turned into a JPY-positive reversal that has spilt into other pairs like GBP/JPY and EUR/JPY. 

The magnitude of the pullback sparked speculation of Japanese intervention in markets, which has become somewhat of a norm as the yen has continuously depreciated over the past two years. It has also become common for Japanese officials to not confirm whether they have intervened in the market or not. Whilst this method does not offer long-lasting results, it does offer short-term opportunities for JPY buyers. 

The continuation of the bearish trend in USD/JPY may also be attributed to a weaker dollar as markets ramp up expectations of a rate cut from the Federal Reserve in September. Softer inflation and labour market data have led many to believe that the US economy is primed and ready for monetary conditions to start becoming looser. 

That said, the fact that both GBP/JPY and EUR/JPY are also seeing continued downside momentum does allude to some strength in the yen. Two factors could be causing this. One, there has been an increase in risk-off sentiment in global markets. Two, analysts are becoming more confident that the Bank of Japan (BoJ) could hike rates by 10 basis points at its meeting next week. Current market pricing shows a probability of 43% of this happening. 

A combination of rising rates in Japan and falling rates elsewhere could see the long-term bearish trend in JPY start to reverse. If so, USD/JPY sellers could come out in force and attempt to bring the pair back below 150. 

For now, the short-term bias remains positive for the yen, weighing on USD/JPY, GBP/JPY and EUR/JPY. That said, the fundamentals still support the other currencies versus the yen, so if we don’t see much commitment from the BoJ to hike rates next week then it’s likely that the reversals will start to lose momentum and the longer-term bullish trends in all three pairs will resume. 

USD/JPY daily chart

_{Past performance is not a reliable indicator of future results.}