USD/JPY is showing little movement on Tuesday, as the pair trades at the 110 level in the North American session. On the release front, Japanese BSI Manufacturing Index disappointed, with a weak reading of -2.9 points. This was well off the estimate of +1.5 points. In the US, PPI dropped to a flat 0.0%, matching the forecast. On Wednesday, the US releases key retail sales and CPI reports. As well, the Federal Reserve is expected to raise interest rates by a quarter-point, to 1.00 percent.
Central banks will be in focus this week, with interest rate announcements out of the US and Japan. All eyes are on the Federal Reserve, which holds its monthly policy meeting later on Wednesday. The markets have priced in a quarter-point hike, at close to 100%, so it would be a major shock if the Fed doesn’t make a move. What’s in store after that? An additional rate hike seems much less likely in the third quarter, with the CME forecasting the odds of a September move at just 28%. The markets are skeptical about another rate hike unless the political situation in Washington shows signs of stabilizing. The Trump administration remains in damage control mode, as it’s difficult to assess the damage from the dramatic evidence of ex-FBI director James Comey. The Trump administration continues to lurch from one crisis to another, and President Trump seems disconnected not just from the Democrats, but from many Republican lawmakers as well. The Fed and the markets have serious concerns with regard to Trump’s ability to move forward with his economic agenda, and this sentiment could weigh on the US dollar.
The BoJ will release its rate statement on Thursday. The BoJ has maintained an ultra-loose monetary policy in order to prop up inflation and domestic demand. Although the economy has recently received a boost from stronger global demand, inflation remains well below the central bank’s 2.0% target, and consumer demand has been soft. The BoJ is unlikely to shift directions and tighten policy anytime soon, but analysts will be combing through the rate statement and BoJ Governor Haruhiko Kuroda’s press conference, looking for nuances in BoJ language. A key component of the BoJ’s policy has been bond purchases, but the bank has slowly been reducing these purchases, and could make reference to the slowdown in the bond-buying program on Thursday. If the central bank’s message is more hawkish than expected, the yen could respond with gains.
