Dollar/Yen Braces for Battle at 160-164 Range as New Fed Chair Testimony and US CPI Serve as Litmus Tests

The foreign exchange market in the week of July 13 is set to see the dollar/yen pair probe for direction within a 160 to 164 yen range, with Federal Reserve Chair Warsh's congressional testimony and the release of the June US Consumer Price Index (CPI) serving as the primary catalysts. The market is keenly aware of the risk that expectations for additional US rate hikes could shift dramatically depending on the inflation data and the new chair's remarks. The June US CPI, due on the 14th, and Chair Warsh's semi-annual congressional testimony spanning the 14th and 15th will determine the dollar's trajectory for the week. The June US employment report released late last week showed nonfarm payrolls increased by 57,000 month-over-month, significantly undershooting market expectations and rapidly intensifying the sense of a slowing labor market. With caution over additional rate hikes amid persistent inflation still simmering, a further deceleration in the upcoming CPI could trigger a sharp pullback in market-implied rate hike probabilities. This marks the first congressional testimony for Chair Warsh, who assumed office in May. According to an analysis contributed to the 21st Century Business Herald by Zhang Ming of the Chinese Academy of Social Sciences, Chair Warsh has shown a preference for "rate cuts" and "balance sheet reduction," a stance that has contributed to pushing long-term interest rates higher, lifting the 10-year US Treasury yield from around 4.0% to approximately 4.5%. The market is still gauging the new chair's effective policy stance, and a climate of swirling speculation over the finer details of the testimony is expected to persist. On the domestic front in Japan, the Bank of Japan's release of its current account deposit outlook on the 6th confirmed that the sharp yen appreciation seen on the 2nd was not the result of yen-buying intervention by the government or the central bank. Consequently, the excessive wariness of surprise, covert intervention that had temporarily gripped the market has receded. That said, should the exchange rate weaken substantially beyond 163 yen per dollar, concerns over intervention could reignite as the market becomes conscious of the authorities' perceived defense line. However, at levels below that threshold, the market has little incentive to rush into selling dollars out of fear of a one-sided yen appreciation risk. Even if US events next week temporarily exert downward pressure on the dollar, the prevailing view is that the persistent Japan-US interest rate differential and easing intervention fears will provide support, keeping the dollar/yen's downside firm. EUR/USD is expected to fluctuate within a 1.1200 to 1.1600 dollar range. Following the US employment report, there was a moment where the pair was bought back up to 1.1473 dollars. The European Central Bank's (ECB) decision to raise rates in June, driven by heightened inflation amid geopolitical risks, is also a factor underpinning the euro's downside. According to cryptocurrency-related media outlet BitcoinWorld, the euro briefly breached the 1.1400 dollar level against the backdrop of rising expectations for additional ECB rate hikes. The market sees a high probability of a 0.25% rate increase at the next meeting, with some even pricing in a larger hike. Senior ECB officials have voiced that pausing rate hikes would be premature, citing persistently sticky core inflation, particularly in the services sector. Nevertheless, deep-seated uncertainty over the European economic outlook remains fundamental. While a US CPI print or Fed Chair testimony that triggers dollar weakness would be a factor pushing EUR/USD higher, the pair is expected to fluctuate within its range while market participants monitor US interest rates and crude oil prices. Regarding the Middle East situation, while uncertainty lingers over the trajectory of peace talks between the United States and Iran, armed conflict between the two nations has been limited to a small scale, and crude oil prices are on a downward trend. Zhang Ming points out that the probability of a formal end to Middle East tensions in the second half of this year is high, with international crude oil prices having fallen from over $100 per barrel (approximately 16,000 yen) to around $70 per barrel (approximately 11,000 yen). As a result, the scope for the year-on-year growth rate of the US CPI, particularly core CPI, to expand further is narrowing. There is a view that the number of Fed rate hikes in the second half of this year may fall short of two, and a scenario where the policy rate is left unchanged cannot be ruled out. With US midterm elections approaching toward year-end, the Republican Party is wary of the fiscal and financial turmoil that persistently high long-term interest rates could bring. Rising long-term rates amplify concerns over the sustainability of government debt and risk accelerating a correction in high-valuation stocks, particularly those tied to AI. Such political pressure could also compel the Fed to manage its balance sheet more cautiously. The projected range for USD/JPY is 160.00 to 164.00 yen. For EUR/USD, it is 1.1200 to 1.1600 dollars. The market's focus remains on trends in US long-term interest rates and the divergence in monetary policy stances between Japan and the United States. In European and US markets on the 10th, yen buying initially took the lead on speculation over expanded investment in Japanese domestic assets and currency intervention, but persistent dollar buying driven by expectations of a US rate hike in September saw USD/JPY find a floor around the 162.20 yen level and resist further declines. A wait-and-see mood may strengthen early in the week ahead of the Fed Chair's testimony and the CPI release, but depending on the outcomes, a rapid surge in dollar volatility is also conceivable. For EUR/USD, the 1.1400 dollar level is seen as a technical juncture; if it can hold above this level, a test of the upside toward 1.1500 dollars comes into view.