Yen Reverses Hard as Market Doubts BoJ Urgency, Dollar Retains Momentum – Action Forex

Yen’s sharp intraday reversal became the central focus in FX markets today, as traders reassessed BoJ’s latest policy guidance and economic projections. While initial positioning leaned toward hawkish interpretations, especially after last week’s US–Japan trade breakthrough, sentiment quickly pivoted as markets leaned into a more dovish read of BoJ’s inflation outlook.

On the one hand, BoJ did indicate confidence that underlying inflation would rise and stabilize around its 2% target within the projection horizon—a signal that supports gradual policy normalization. However, the near-term inflation picture was tempered. The central bank emphasized that the projected jump in core CPI to 2.7% this fiscal year was largely due to food prices, which do not reflect sustained demand-pull inflation. This cautious tone signaled no rush to raise rates again.

The reaction in FX was clear. Traders who had cut Yen shorts ahead of the meeting—in anticipation of a hawkish surprise—quickly reloaded those positions as the perceived risk faded.

Meanwhile, Dollar remains the week’s top performer, underpinned by firm core PCE inflation and steady jobless claims data. Despite ongoing political pressure from US President Donald Trump to slash rates, markets continue siding with the Fed’s patient stance. Odds of a September cut have now slipped below 40%.

In broader FX rankings, Loonie and Sterling are second and third strongest this week, while Euro and Swiss Franc lag at the bottom. Aussie remains weak too, while the Yen and Kiwi sit in the mid-pack.

On the trade front, U.S. Treasury Secretary Scott Bessent said negotiations with China in Stockholm have made progress, though “a few technical details” remain. He struck an optimistic tone but admitted that Trump has yet to be briefed on the outcome. Markets are watching closely, with the August 12 truce deadline with China fast approaching.

In Europe, at the time of writing, FTSE is up 0.30%. DAX is down -0.27%. CAC is down -0.45%. UK 10-year yield is down -0.016 at 4.592. Germany 10-year yield is down -0.011 at 2.698. Earlier in Asia, Nikkei rose 1.02%. Hong Kong HSI fell -1.60%. China Shanghai SSE fell -1.18%. Singapore Strait Times fell -1.08%. Japan 10-year JGB yield fell -0.007 to 1.556.

US core PCE holds at 2.8%, income and spending rebound

Fed’s preferred inflation gauge offered little relief in June, with the core PCE index holding at 2.8% yoy, above market expectations of 2.7% yoy. Headline PCE inflation also rose more than expected from 2.4% yoy to 2.6% yoy. Both monthly readings stood at 0.3% mom, reinforcing the message that price pressures are proving sticky and raising questions about the timing of any Fed rate cuts.

On the household front, income and spending showed modest improvement. Personal income climbed 0.3% mom, rebounding from a surprise decline in May. Personal spending rose by the same margin, albeit slightly below the 0.4% mom forecast. The recovery suggests consumers remain active, but the slight miss in spending hints at growing sensitivity to price levels and borrowing costs.

Labor data, however, remained steady: initial jobless claims edged up by 1 to 218k and continuing claims were flat at 1.946 million—consistent with a still-solid employment backdrop.

Altogether, the mixed bag of sticky inflation, resilient income, and cautious consumption leaves the Fed on hold, with markets still uncertain about the case for a September rate cut.

Canada’s economy shrinks again in May, but June rebound eyed

Canada’s GDP contracted by -0.1% mom in May, marking a second consecutive monthly decline and aligning with expectations.

The decline was driven by weakness in goods-producing sectors, particularly a pullback in mining, quarrying, and oil and gas. While manufacturing managed to expand, services output was flat overall. Only 7 out of 20 industries registered growth.

However, there may be some relief on the horizon—Statistics Canada’s advance estimate suggests GDP rose 0.1% in June, with strength in retail and wholesale trade partially countered by a dip in manufacturing.

European data wrap: German CPI and Swiss retail surprise to upside

European data released today pointed to continued labor market resilience and upside surprises on inflation.

Eurozone unemployment rate held steady at 6.2% in June, defying expectations of a slight uptick to 6.3%. Across the broader EU, the jobless rate was unchanged at 5.9%, underscoring continued employment strength despite trade disruptions and slowing manufacturing activity.

In Germany, inflation pressures were firmer than expected. Headline CPI rose 0.3% mom in July, outpacing consensus for a 0.2% rise. Annual inflation held at 2.0% yoy, above the expected 1.8% yoy, suggesting steady underlying pressures even amid weaker growth. Import prices were flat on the month, beating forecasts for a modest decline of -0.2% mom, potentially limiting some disinflation via exchange rate channels.

Separately, Switzerland surprised to the upside with a 3.8% yoy surge in June retail sales, well above the 0.2% yoy consensus. The data offers a counterpoint to concerns about weakening domestic demand in the region and may reinforce the case for a patient SNB as it weighs the need to bring back negative rate.

BoJ holds at 0.50%, lifts 2025 inflation projections sharply on food costs

The BoJ kept its short-term policy rate unchanged at 0.50% as expected, reaffirming its cautious stance in the face of growing external risks. While the central bank reiterated its intention to continue normalizing policy in light of improving economic and price conditions, it also cited heightened uncertainty around global trade and policy developments as justification for a steady hand.

In its latest quarterly outlook, the BoJ sharply raised its inflation forecasts. Core CPI for fiscal 2025 was lifted from 2.2% to 2.7%. Core-core CPI, which excludes both fresh food and energy, jumped from 2.3% to 2.8%. The upward revisions were largely attributed to food price increases, though the BoJ still sees underlying inflation remaining subdued in the first half of the forecast horizon.

For fiscal 2026, core CPI was revised slightly higher from 1.7% to 1.8%, and core-core CPI from 1.8% to 1.9%. Projections for fiscal 2027 remained unchanged at 2.0% for both measures. The Bank noted that inflation will pick up toward levels “generally consistent” with the price stability target in the second half of the projection period.

Growth outlooks were little changed. The fiscal 2025 GDP forecast was lifted modestly to 0.6% from 0.5%, while estimates for fiscal 2026 and 2027 were held at 0.7% and 1.0%, respectively. The Bank continues to expect a slow but steady recovery, supported by resilient domestic demand and improvements in global conditions.

BoJ emphasized that the risk balance for growth remains tilted to the downside for 2025 and 2026, though price risks are now broadly balanced.

Asia data wrap: Japan and Australia outperform but China falters

Asian economies delivered mixed signals as fresh data highlighted strength in Japan and Australia while exposing continued softness in China.

Japan’s industrial production rose 1.7% mom in June, defying forecasts for a -0.7% mom decline. The surge was driven by a 14.8% mom jump in transport equipment excluding autos and strength in electronics, a positive surprise despite ongoing US tariffs. Retail sales also rose 2.0% yoy, slightly beating forecasts of 1.8% yoy.

Australian retail sales posted an impressive 1.2% monthly gain in June, sharply above the 0.4% mom consensus. The ABS attributed the spike to widespread discounting and new product launches.

Meanwhile, China’s July PMIs disappointed. The NBS Manufacturing PMI dipped from 49.7 to 49.3, remaining in contraction for the fourth straight month. The export component showed no signs of recovery, marking 15 months of sub-50 readings at 47.1 Non-Manufacturing PMI also weakened from 50.5 to 50.1, its lowest since November.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 148.39; (P) 148.96; (R1) 150.12; More…

USD/JPY’s rally continues today and remains on track to 100% projection of 139.87 to 148.64 from 142.66 at 151.43, which is close to 151.22 fibonacci level. Decisive break there could prompt upside acceleration to 161.8% projection at 156.84 next. On the downside, below 148.58 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

In the bigger picture, price actions from 161.94 (2024 high) are seen as a corrective pattern to rise from 102.58 (2021 low). Decisive break of 61.8% retracement of 158.86 to 139.87 at 151.22 will argue that it has already completed with three waves at 139.87. Larger up trend might then be ready to resume through 161.94 high. In case the corrective pattern extends with another fall, strong support is expected from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound.