Japanese Yen slides to two-week low, seems vulnerable as USD stands firm ahead of US CPI

The USD/JPY pair touches a one-and-a-half-week high during the Asian session on Wednesday, with bulls now looking to build on the momentum further beyond mid-159.00s amid a supportive fundamental backdrop.

The initial surge led by the first US-Japan joint intervention since 1998 has largely faded as the wide rate gap between Japan and other major economies keeps the so-called carry trade active, undermining the Japanese Yen (JPY). Furthermore, Prime Minister Sanae Takaichi's aggressive economic stimulus and tax cuts have raised concerns about Japan's worsening fiscal condition. This, along with economic risks stemming from the continued energy disruptions due to the Iran war, continues to weigh on the JPY and acts as a tailwind for the USD/JPY pair.

Meanwhile, the Reuters Tankan survey showed that Japanese manufacturers' sentiment index ​climbed from 13 in the previous month to 18 in August, marking the highest level since March 2026. Adding to this, the gauge for non-manufacturers rose to 28 from 25 in July. Furthermore, traders are also increasingly pricing in the possibility of another Bank of Japan (BoJ) rate hike, with Tokyo Tanshi data showing a 66% chance of a move in September. This, however, does little to impress JPY bulls or dent the underlying strong bullish sentiment surrounding the USD/JPY pair.

The US Dollar (USD), on the other hand, is looking to build on this week's gains amid expectations that higher oil prices would rekindle inflationary pressures and force the US Federal Reserve (Fed) to adopt a more hawkish stance. According to the CME Group's FedWatch Tool, traders are assigning over a 75% chance that the US central bank will raise borrowing costs at least once by the end of 2026. This remains supportive of elevated US Treasury bond yields, which, along with geopolitical uncertainties, support the USD and the USD/JPY pair.

Traders, however, seem hesitant ahead of the crucial US Consumer Price Index (CPI) report, due later today. Apart from this, the US Producer Price Index (PPI) on Thursday will influence market expectations about the Fed's future policy path, which, in turn, will drive the USD demand. Apart from this, further developments surrounding the Middle East crisis should provide some meaningful impetus to the buck and the USD/JPY pair. Nevertheless, the aforementioned factors support prospects for an extension of the pair’s recent strong recovery move from the 155.25-155.20 region, or the lowest since May, set earlier this month.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair sits below the 50.0% Fibonacci retracement level of the post-intervention slump and the 61.8% level at 160.63, which suggests that recent gains are losing traction and that upside attempts are increasingly constrained by overhead supply. On the downside, initial support is seen at the 38.2% retracement at 158.58, ahead of the 23.6% level at 157.31, while a deeper slide would expose the structural anchor near 155.26.