Fed hike expectations likely remain the main driver of USD/JPY

Recent price action has been consistent with the view that USD/JPY should oscillate around 123 with risks on both sides. Upside risks include a bringing forward of Fed hike expectations and downside risks include a deterioration of risk sentiment.

Having said that, Japan factors have become less supportive of the yen recently, including slowing economic activity, decelerating core CPI, and a sharp drop in approval ratings of the Abe administration.

Economic data have disappointed lately, suggesting that Q2 GDP will contract and y/y core CPI will likely to turn negative again over the summer/fall. In this light, the June Household survey, June Industrial Production, and June Core CPI will demand some attention this week. 

"June real household spending is expected to increase +2.8% y/y, the second consecutive month of positive y/y growth. June Industrial Production is expected to increase +0.1% m/m, but translates to a 1.8% contraction in Q2 as a whole. On inflation, June core CPI is expected to stay at +0.1% y/y from +0.1% in May", says Barclays. 

A combination of worsening economic activity, decelerating core inflation on the back of falling oil prices, and a deteriorating cabinet approval rating suggest that there may be less incentive for political jawboning against yen weakness than there was a month ago. 

"All in all, Japanese data and political development will continue to demand close monitoring while Fed hike expectations likely remain the main driver of USD/JPY in the weeks ahead especially given important US events, including FOMC, GDP, core PCE deflator, and nonfarm payrolls", added Barclays.