The USD/JPY pair experienced a significant drop, reaching the 142.15 region on Friday, marking its lowest point in two weeks. Surprisingly, despite facing intense selling pressure following lower-than-expected Nonfarm Payrolls, the USD is poised to record a weekly gain. Notably, wage inflation remains a persistent factor.

According to the recent report from the US Bureau of Labor Statistics, June’s Nonfarm Payrolls fell short of expectations. The data revealed an addition of 209K jobs in the US economy for the month, lower than the anticipated 225K and a decrease from the previous figure of 306K. However, wage growth remained positive, exceeding projections with a monthly increase of 0.4% as opposed to the expected 0.3%. The Unemployment rate stood at 3.6%.

Consequently, the release of these figures triggered a widespread decline in US Treasury yields. The 2-year yield witnessed a significant drop, settling at 4.90% after a decrease of over 1.70%. Similarly, the 5-year and 10-year yield rates reached 4.29% and 4.02% respectively.

It is noteworthy that Jerome Powell has mentioned the possibility of further tightening in response to a tight labor market and warned of potential challenges. Furthermore, while wage inflation remains persistent, the Fed may face pressure to continue tightening or maintaining high rates until a downward trend is observed.

Looking ahead, the CME FedWatch Tool indicates that investors have fully factored in a 25 basis points increase in the upcoming July meeting of the Fed. If this materializes, interest rates will rise within the range of 5.25% to 5.50%. Additionally, there is nearly a 40% likelihood of an additional 25 bps hike by December.

All eyes are now focused on the imminent release of the Consumer Price Index (CPI) data for June from the US, scheduled for next Wednesday. This data will continue to shape expectations regarding the Federal Reserve’s upcoming decision on July 26.


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