USD/JPY steadies as US data softens, BOJ hike bets firm

The USD/JPY exchange rate maintained its upward trajectory on Tuesday, shrugging off softer U.S. economic data while traders maintained bets on an imminent interest rate increase by the Bank of Japan (BOJ).

The dollar held near a one-week high against the yen, with the pair trading around 156.80, as investors digested mixed signals from recent U.S. economic releases. U.S. durable goods orders fell 0.5% in April, missing expectations for a 0.2% rise, while pending home sales declined 7.7% month-on-month, underscoring concerns over the resilience of the U.S. economy. Despite these headwinds, the dollar’s decline was limited by persistent expectations that the Federal Reserve will maintain a relatively tight monetary policy stance for the foreseeable future.

Meanwhile, the yen’s weakness persisted as market participants priced in a near-certain likelihood of a BOJ rate hike at its upcoming policy meeting. Speculation has intensified following remarks from BOJ Governor Kazuo Ueda, who hinted at the possibility of further adjustments to the central bank’s ultra-loose monetary policy if inflation trends continue to align with projections. Traders are now pricing in a roughly 70% probability of a 10-15 basis point rate hike at the BOJ’s June meeting, according to interest rate futures data.

The divergence in monetary policy expectations between the Federal Reserve and the BOJ has been a key driver of the yen’s underperformance this year. While the Fed has signaled a prolonged period of higher interest rates to combat inflation, the BOJ has gradually shifted toward policy normalization, albeit cautiously. This policy gap has supported the dollar’s strength against the yen, with the USD/JPY pair up nearly 10% year-to-date.

Analysts note that further gains in the dollar-yen pair could be capped by potential intervention risks, given the yen’s recent depreciation to multi-decade lows. Japanese authorities have repeatedly warned of their readiness to act to curb excessive volatility in the currency market, though no concrete steps have been announced. The BOJ’s next policy decision is scheduled for June 14, with markets closely monitoring for any signals on the pace and scope of future rate hikes.