EUR/USD, USD/JPY: Fed rate hike bets ease, yen remains weak

The U.S. dollar maintained its upward momentum on Wednesday, extending gains against the yen and euro as expectations for Federal Reserve interest rate hikes diminished. The shift in market sentiment followed softer-than-anticipated U.S. economic data, which reduced bets on aggressive monetary tightening by the Fed.

The EUR/USD pair traded marginally lower, reflecting a modest decline in the single currency as investors reassessed the outlook for the European Central Bank’s policy path. The euro’s decline came despite a slight improvement in Eurozone inflation data, which did little to alter the broader trend of cautious optimism among traders. The pair remained within a familiar range, consolidating recent losses without a clear directional breakout.

Meanwhile, the USD/JPY exchange rate held near multi-decade highs, underscoring the yen’s persistent weakness. The Japanese currency has faced sustained pressure amid divergent monetary policies between Japan and the U.S., with the Bank of Japan maintaining ultra-loose policy settings while the Fed signals potential rate cuts later this year. The yen’s decline has been further exacerbated by Japan’s fragile economic recovery and subdued wage growth, which have limited the case for tighter monetary policy in Tokyo.

Analysts noted that the divergence in central bank policies continues to drive currency movements, with the dollar benefiting from higher real yields and a relatively stronger growth outlook. The lack of significant intervention by Japanese authorities to stem yen weakness has also contributed to the currency’s prolonged depreciation. Market participants will closely monitor upcoming U.S. data releases, including retail sales and labor market indicators, for further signals on the Fed’s policy trajectory.

The yen’s weakness shows no signs of abating in the near term, with traders citing structural factors such as Japan’s aging population and persistent trade deficits as key headwinds. The USD/JPY pair is expected to remain elevated unless a shift in global risk sentiment or a surprise policy adjustment by the Bank of Japan triggers a reversal.