USD/JPY rebounds from three-week low as strong US PPI, labor data lift US Dollar

• USD/JPY jumps over 150 pips from a three-week low on strong US data.
• US PPI data shows inflation rose sharply in July, with both headline and core readings well above expectations.
• BoJ faces mounting pressure to shift from "underlying inflation" focus as headline CPI stays above 3%; speculation builds for October rate hike.

The Japanese Yen (JPY) loses ground against the US Dollar (USD) on Thursday, snapping a two-day winning streak after stronger-than-expected US Producer Price Index (PPI) and steady Weekly Jobless Claims data lifted the Greenback.

USD/JPY, which fell earlier in the day to its lowest level in three weeks near 146.22, attracted fresh buying interest and reversed sharply higher during the American session, last seen trading around 147.90, up nearly 0.35%. The rebound in the pair mirrors a broader recovery in the US Dollar, with the Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, climbing back above the 98.00 mark after hitting a more than two-week low on Wednesday.

The latest US macro data strengthened the case for the Federal Reserve (Fed) to proceed with a measured pace of policy easing, dampening expectations for aggressive rate cuts later this year. Initial Jobless Claims fell to 224K, beating forecasts, while Continuing Claims eased to 1.953 million. July's PPI surged 0.9% MoM -- the biggest rise since June 2022 -- lifting the annual rate to 3.3%. Core PPI also jumped 0.9% MoM, pushing the yearly rate to 3.7%, both well above expectations.

Meanwhile, the Bank of Japan (BoJ) remains under growing domestic and external pressure to clarify its inflation assessment. Headline inflation stood at 3.3% in June, well above the 2% target, yet the BoJ continues to rely on "underlying" measures that focus on demand and wage growth. Critics argue this approach risks underestimating persistent price pressures and delaying necessary policy action. Recent comments from US Treasury Secretary Scott Bessent, who said the BoJ is "behind the curve" and likely to raise rates soon, have amplified speculation of a possible policy shift as early as October if inflation remains elevated and wage data show further strength.

Looking ahead, attention turns to Friday's key economic releases from both Japan and the United States. In Japan, preliminary Q2 Gross Domestic Product (GDP) is expected to show a modest 0.1% QoQ expansion after stagnating in the prior quarter, while the annualized pace is seen accelerating to 0.4% from a 0.2% contraction. The GDP deflator is forecast to ease slightly to 3.1% YoY from 3.3%.

On the US side, July Retail Sales are projected to rise 0.5% MoM after a 0.6% increase in June, while Industrial Production is expected to remain flat following a 0.3% gain previously. The preliminary University of Michigan survey for August is likely to show Consumer Sentiment ticking up to 62.0 from 61.7, although the Consumer Expectations Index is seen easing to 56.5 from 57.7.