USD/JPY has posted considerable losses on Wednesday, as the pair is down 0.70 percent. In the North American session, the pair is trading at 109.25. On the release front, Japanese Revised Industrial Production rebounded strongly in April, posting a gain of 4.0 percent. This was just shy of the forecast of 4.1 percent. In the US, consumer data was weak, as retail sales and CPI posted declines of 0.3% and 0.1%, respectively. Later in the day, the Federal Reserve announces its benchmark rate, which is expected to increase by 25 basis points to 1.25 percent. On Thursday, the US releases unemployment claims, with an estimate of 241 thousand.
In recent months, Federal Reserve policymakers have been sending out broad hints that a rate hike is on the way, and the markets expect the Fed to make a move later on Wednesday. The markets have priced in a rate hike at close to 100%, but there is still plenty of anticipation in the air, as analysts will be focusing on the language of the rate statement. Analysts are predicting that the Fed will deliver a "dovish hike", meaning that together with the rate increase, the Fed rate statement will be cautious in tone, and dovish regarding additional rate hikes. Earlier in the year, three rate hikes in 2017 seemed almost a given, but currently, the odds of a September move are just 28%. There are two key items which could affect the US dollar. First, the Fed’s Economic Projections will detail forecasts of inflation, growth and unemployment, and most importantly, the rate hike path. With the US economy performing better in the second quarter, there’s a strong likelihood that the Fed will not moderate its rate hike projections,which is good news for the dollar. Secondly, the markets will be looking for details regarding its plan to lower the $4.2 trillion balance sheet. If the Fed outlines a plan to reduce its holding in H2, the dollar could respond positively. Another variable is the Fed’s view of the political paralysis which has engulfed Washington. With the Trump administration spending most of its energy on damage control, little progress is being made with regard to Trump’s agenda of tax reform and major spending on infrastructure. The markets are becoming more skeptical about Trump’s ability to work with Congress, and if this sentiment is shared by the Fed, it is likely to sound dovish regarding rate hikes in September or December.
The BoJ will be in the spotlight on Thursday, as it releases a rate statement, followed by a press conference with BoJ Governor Haruhiko Kuroda. 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 Kuroda’s follow-up comments, 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 tone is more hawkish than expected, the yen could respond with gains.
