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The yen strengthened on Friday following reassurances from BOJ Governor Kazuo Ueda about the potential for future rate hikes, despite market instability. Meanwhile, investors await Fed Chair Jerome Powell's speech at Jackson Hole for insights into the U.S. rate-cutting trajectory as markets price in significant easing by year-end.

Highlights

Yen Rises Amid BOJ's Stance and Market Nerves: The Japanese yen appreciated to 145.75 per dollar as Bank of Japan Governor Kazuo Ueda calmed market nerves following last month's surprise rate hike, indicating readiness to increase rates if inflation targets are met, while noting financial market instability.

BOJ's Commitment to Potential Rate Hikes: Kazuo Ueda's comments suggested that despite market turbulence, the Bank of Japan is not deterred from considering future rate hikes, highlighting the possibility of more rate hikes if inflation aligns with the 2% target, even if not imminent.

Impact of BOJ's Rate Hike on Global Markets: The Bank of Japan’s unexpected interest rate increase in July disrupted global markets, with traders unwinding carry trades involving the yen, contributing to a global selloff earlier this month, though markets have largely recovered since.

Dollar Index and Fed's Rate Cut Expectations: The dollar index, dipped close to its 2024 low, as traders anticipate a 73.5% chance of the Federal Reserve cutting rates by 25 basis points in September amid cooling inflation and labor market.

Powell's Anticipated Speech at Jackson Hole: Traders are keenly awaiting Federal Reserve Chair Jerome Powell's speech at Jackson Hole, expecting signals on the timing and magnitude of rate cuts. Analysts predict Powell will offer cautious guidance, emphasizing a gradual approach to interest rate cuts.

Euro and Sterling Show Strength Against the Dollar: The euro rose close to its 13-month high, while the British pound remained steady, near its highest level in 13 months. This strength reflects market expectations of more aggressive rate cuts by the Fed compared to the ECB or Bank of England.

Conclusion

The Bank of Japan's commitment to potentially raising rates if inflation aligns with targets is boosting the yen, suggesting that market volatility won't deter further monetary tightening. As attention shifts to Powell's Jackson Hole speech, traders are looking for clues on the pace of U.S. rate cuts. However, the anticipated cautious approach by Powell may temper aggressive market expectations, shaping the financial landscape in the coming months.

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