Doubts over Federal Reserve plans
The effect of interest-rate divergence on USD/JPY has further been exacerbated by changing expectations of monetary policy in the US.
Whereas the US Federal Reserve (Fed) had expected to make three 0.25% reductions in interest rates in 2024 the start of the year, the persistence of stubbornly high inflation has led many to doubt this will be the case.
Strong US labor market data on Friday and an unexpected fall in the Unemployment Rate, have further suggested that inflation is likely to remain sticky as more workers earning are likely to also continue spending.
A key macroeconomic release on the calendar this week will be US Consumer Price Index (CPI) data out on Wednesday. If the data shows a rise above expectations it will further reduce the probability that the Fed will cut interest rates as much as previously expected.
The persistence of higher interest rates in the US and lower interest rates in Japan are likely to maintain upside pressure on USD/JPY.
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