Yen Catapults And It's All About Fed, Japanese Data Galore Today

The yen skyrocketed on Thursday, boosted by the moderation in expectations surrounding the aggressiveness of Fed rate hike trajectory on the back of Wednesday's comments from Chair Powell & Thursday's U.S. GDP data.

• After this week's FOMC policy decision, Powell noted that tightening will have to slow eventually. Meanwhile, the latest set of GDP figures showed a second consecutive quarterly contraction. This combination prompted participants to pare back hawkish Fed bets.
• Owing to the BoJ's ultra-easy monetary policy stance, growing interest-rate differential with the U.S. has been the key driver of USD/JPY rally over the past few months. The prospect of more measured counterinflationary steps from the Fed promoted the narrowing of U.S./Japan 10-year yield gap, which shrank to levels last seen in April.
• Technical momentum facilitated the downswing in USD/JPY, the pair extending weakness as Jul 22 low of Y135.57 gave way. The rate retreated all the way to Y134.20, its worst level in more than a month, finding support just above its 50-DMA.
• Options traders added bearish USD/JPY bets, with 1-month risk reversals staging a retreat from its weekly highs. Demand for yen calls was most pronounced in the front-end but also observable further out the curve.
• Spot USD/JPY last deals at Y134.33, up 6 pips on the day. Bulls need a bounce above Jul 27 high of Y137.46 and Jul 14 high of Y139.39 to regain poise. Bears look for a confirmation of building downside momentum, which could come in the way of a dip through the 50-DMA (Y134.29), bringing Jun 16 low of Y131.50 into view.
• There is a wealth of data due out of Japan today, including (but not limited to) Tokyo CPI, unemployment, retail sales and flash industrial output. It is expected that Tokyo core CPI stayed above the BoJ's 2% target in July, due to a weak yen. On that note, we will get a glimpse of the Bank's thinking through a summary of opinions from the most recent monetary policy meeting.