USD/JPY Rebounds from One-Week Low: Market Reaction to US Report

In the Asian session, the USD/JPY pair has attracted buyers and experienced a rally, reaching near the 143.00 level. The pair has gained momentum, up 0.57% on the day, recovering from Friday's decline to a one-week low at 142.06. This recovery coincides with the US Dollar Index (DXY) making a solid comeback early on Monday.

Investors are currently digesting the US labor data, which suggests that the Federal Reserve (Fed) may not proceed with two rate hikes as previously anticipated. The US Nonfarm Payrolls (NFP) report for June revealed an increase of 209,000 jobs, slower than the 306,000 recorded in May. Meanwhile, the Unemployment Rate dropped from 3.7% to 3.6% in June, and Average Hourly Earnings remained unchanged at 0.4%, surpassing the market expectation of 0.3%. Following this softer US data, USD/JPY initially experienced a sharp decline to a one-week low but has rebounded strongly during Monday's Asian session, aligning with the recovery of the US Dollar and US Treasury bond yields.

Despite the revised outlook, market players remain confident that the Fed will raise rates by 25 basis points at the upcoming July 25-26 policy meeting. According to the CME Group's FedWatch Tool, the current odds stand at 92.4%, higher than the previous week's 86.8%. This supports the renewed upside in US Treasury bond yields and bolsters the US Dollar across various currency pairs.

On the Japanese front, the Ministry of Finance reported that Japan's current account surplus more than doubled year-on-year in May, marking the fourth consecutive month of gains. This was attributed to a narrowing trade deficit and increased income gains from overseas investments. However, the possible intervention by the Japanese central bank in the foreign exchange (FX) market could limit the upside potential of USD/JPY. Masato Kanda, the top currency diplomat, stated that he has been engaged in discussions with various countries, including the US, regarding currencies.

Looking ahead, market participants will closely monitor key data releases, including the US Consumer Price Index (CPI), the Producer Price Index (PPI), and the US University of Michigan Preliminary Consumer Sentiment for July later in the week. Additionally, the Japanese Producer Price Index (PPI) YoY and revised Industrial Production MoM will be featured on Wednesday and Friday, respectively. Traders may opt to remain on the sidelines until these significant data points are released.