MUFG Research discusses the USD outlook into this week's US CPI report and Fed Warsh'ssemi-annual monetary policy testimony.

"Attention will now turn to the release of the June US CPI report and semi-annual monetary policy testimony from Fed Chair Warsh. If underlying inflation pressures remain contained, it could prompt market participants to scale back expectations for Fed hikes, resulting in a reversal of the recent USD rally. It would also help to reduce pressure on Japanese policymakers to support the JPY," MUFG notes.

Finance Minister Katayama stepped up verbal intervention last week by stating that the government wants to encourage households, as well as pension funds including the Government Pension Investment Fund (GPIF), to increase their investment in Japanese financial assets. While a significant shift in asset allocation appears unlikely in the near term, the comments have helped to ease selling pressure on both JGBs and the JPY. Over the longer term, however, this policy shift could have more far-reaching implications for domestic capital flows and provide more support for Japanese financial markets," MUFG adds.