Japanese Yen Steady Amid Mixed Economic Signals – USD/JPY Faces Downside Risk

Key Highlights:

• The Japanese Yen trades flat after softer-than-expected Tokyo CPI data.
• BoJ rate hike speculation remains intact despite slower inflation and retail data.
• USD/JPY struggles to gain momentum as traders await US PCE inflation figures.
• Fed independence concerns and weaker US data keep the US Dollar under pressure.

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JPY Holds Ground Despite Weaker Tokyo CPI and Retail Sales

The Japanese Yen (JPY) remained range-bound on Friday, showing limited movement after initial losses in the Asian session. The subdued reaction followed the release of Tokyo CPI data, which showed inflation softening more than expected. Core CPI excluding fresh food dropped to 3.1% YoY in June, down from 3.6% in May, missing forecasts of 3.3%. Retail Sales data also disappointed, rising just 2.2% YoY in May—marking the weakest pace since February.

These weaker figures have prompted speculation that the Bank of Japan (BoJ) may delay its next rate hike until the first quarter of 2026. However, with inflation still running above the BoJ’s 2% target, many investors believe that monetary policy normalization remains on track, keeping JPY bulls cautiously optimistic.

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US Dollar Remains Pressured as Fed Independence Concerns Mount

The US Dollar Index (DXY) continues to hover near multi-year lows, under pressure from mixed economic signals and political concerns. Fed Chair Jerome Powell’s cautious stance in his recent testimony failed to clarify the path forward for interest rates, while former President Donald Trump raised eyebrows by suggesting he may announce Powell’s replacement as early as September. This political uncertainty is adding to concerns over the Fed’s independence.

Adding further weight to the greenback, US GDP was revised lower, showing a -0.5% annualized contraction in Q1, compared to the previous estimate of -0.2%. Consumer spending growth also dropped sharply to just 0.5%, the slowest pace since 2020. Meanwhile, jobless claims remained elevated, and durable goods orders—despite a surprise jump—failed to lift sentiment.

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All Eyes on US PCE Inflation Data

Investors are now closely watching the upcoming release of the US PCE Price Index, the Federal Reserve’s preferred inflation gauge. A softer-than-expected PCE reading could strengthen expectations for a Fed rate cut later in 2025, likely supporting the Yen and dragging USD/JPY lower.

On the flip side, stronger inflation could delay Fed easing and push USD/JPY back toward recent highs.

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USD/JPY Technical Outlook: Bearish Bias Persists

Technically, USD/JPY faces a strong resistance near the 144.80 level, aligned with the 200-period SMA on the 4-hour chart. Momentum indicators are showing increasing bearish pressure. A breakdown below 144.00 could open the door to further declines toward 143.00 or even lower.

However, if the pair breaks decisively above 145.35, it may invalidate the bearish setup and target the 146.70 – 147.00 range in the near term.

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Conclusion: JPY Outlook Favorable Amid USD Weakness and Policy Divergence

Despite mixed domestic data, the Japanese Yen outlook remains supported by persistent inflation, potential BoJ tightening, and a weakening US Dollar. As traders await fresh inflation cues from the US, USD/JPY appears vulnerable to further downside unless the Fed surprises with hawkish commentary or inflation prints hotter than expected.

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