Key points:

  • The yen is under pressure, falling to a two-week low.
  • The market remains pessimistic on the yen due to the difference in yields with other currencies.
  • Investors are waiting for the US inflation report to assess the Fed’s future monetary policy.

On Tuesday, the foreign exchange market showed mixed dynamics. The US dollar remained relatively stable ahead of an important US inflation report, which could influence the Fed’s future monetary policy. Investors are cautiously awaiting data to gauge the outlook for interest rates.

At the same time, the yen came under pressure, falling to a two-week low. This has raised concerns among market participants that the Japanese authorities may once again resort to further intervention in the foreign exchange market to support the yen.

What’s next for the yen?

Traders are once again worried as the yen approaches levels at which Tokyo is expected to intervene. It was last down at 156.41 per US dollar, having touched a two-week low of 156.50 earlier in the session.

There is speculation among traders and analysts that Japan’s Ministry of Finance intervened in the foreign exchange market in late April and early May after the yen hit a 34-year low of 160.245 on April 29. However, the market remains pessimistic about the Japanese currency, given the huge gap between Japan’s ultra-low yields and those of other major economies.

Meanwhile, the euro fell slightly to $1.0786 but is up 1% against the dollar this month. Sterling last traded at $1.2559, up about 0.5% from May.

The dollar index, which measures the U.S. currency against six peers, was last at 105.27. Over the month, the index fell by about 1%.

Assessment of the current situation

There is a subdued atmosphere in the foreign exchange market this week. Investors are busy reassessing the outlook for Fed monetary policy following the release of softer-than-expected US labor market data and statements from Fed officials signaling a possible slowdown in rate hikes.

Expectations of a rate cut in 2024, based on assumptions of slowing inflation, have faded. Investors are now pricing in 42 basis points of monetary policy easing over the course of the year, up from 150 basis points forecast earlier this year.

The probability of a rate cut in September also decreased from 75% to 60%.

The main event of the week will be the release of the consumer price index on Wednesday. It is expected to show core consumer prices rising 0.3% month-on-month in April, slower than 0.4% in March.

Preliminary information on inflation dynamics will be available on Tuesday, after the publication of the US Producer Price Index. Analysts will watch this indicator closely to assess whether inflation is moving towards the Fed’s target of 2%.

Thus, investors closely monitor signals from the Fed and economic indicators to formulate their forecasts regarding the further movement of exchange rates.