Yen dips, markets stabilize ahead of U.S. inflation data

The yen resumed its gradual decline against the dollar after a week of volatile trading, as investors assessed the likelihood of a significant Federal Reserve rate cut next month in light of upcoming U.S. economic data. This easing follows a tumultuous week that began with a substantial sell-off across currencies and stock markets, fueled by concerns over the U.S. economy and the Bank of Japan's hawkish stance. The week concluded on a calmer note, with Thursday's stronger-than-expected U.S. jobs data prompting markets to reduce expectations for Fed interest rate cuts this year. "If global investor risk sentiment continues to improve in the coming week, it is likely that market expectations for Fed rate cuts will continue to be adjusted," noted currency analysts at MUFG. Nevertheless, investors are still pricing in 100 basis points of Fed cuts by year-end, according to the CME Group's FedWatch tool. The upcoming U.S. producer and consumer price data due on Tuesday and Wednesday could significantly influence market perceptions. "It's primarily a case of the market positioning itself ahead of the U.S. inflation data," remarked Christopher Wong, currency strategist at OCBC Bank in Singapore. As of now, the dollar was trading at 147.315 yen, a 0.5% increase. The euro was at $1.091850, while the dollar index remained steady at 103.21. Sterling slipped 0.1% to $1.2764. Just a week ago, the euro had surged to $1.1009, marking its highest point since January . Markets, particularly in Japan, experienced turmoil last week due to an unwinding of the popular yen carry trade, which involves borrowing yen at low rates to invest in higher-yielding currencies and assets. The dramatic sell-off in the dollar-yen pair from July 3 to August 5, driven by Japan’s intervention, a Bank of Japan rate hike, and the unwinding of yen-funded carry trades, led to a decline of 20 yen. Data from the U.S. Commodity Futures Trading Commission and LSEG revealed that leveraged funds' positions on the Japanese yen have shrunk to their smallest net short stance since February 2023 in the latest reporting week.