USD/JPY to maintain its sideways move due to optimistic Fed outlook

Bank of Japan (BoJ) governor Haruhiko Kuroda continued to sound optimistic in yesterday's speech that Japan was well on the way towards reaching the 2% inflation target and decent growth. However, he admitted that the positive feedback mechanism between employment growth, wage rises and higher inflation still had to gain momentum to reach the inflation target. 

He underlined that the BoJ would adjust its monetary policy without hesitation should the inflation trend change as a result of new risks. As the inflation trend moves much more pessimistically than the BoJ, the question is whether there are any further signs that risks for inflation are on the up. 

In addition to the current fall in long term inflation expectations, attention centres on the recent rise of the yen as a result of risk aversion and weaker demand in Q2. The data on industrial production and retail sales due for publication tonight will provide an insight into whether at least the latter is beginning to change.

"At present the demand for the yen as a safe haven is clearly still dominating over concerns about further monetary policy easing in Japan. USD/JPY is once again trading below 120. However, the stronger the yen the more difficult it will become to reach the inflation target and the more likely further BoJ measures get", says Commerzbank. 

For the time being USD/JPY will therefore maintain its sideways move around 120 before the currency pair will move back towards 125 as a result of a more optimistic Fed outlook.