USD/JPY has steadied on Tuesday, after posting considerable gains in the Monday session. In the North American session, the pair is trading slightly at 113.20. On the release front, BOJ Core CPI edged up to 0.3%, matching the forecast. There are no US releases, as US markets are closed for the Fourth of July holiday.
An improved global economy has translated into stronger demand for Japanese products, boosting Japan’s manufacturing and export sectors. Still, consumer spending and inflation remain sore points. Japanese retail sales slowed to just 2.0% in May, compared to 3.2% a month earlier. The weak figure points to a Japanese consumer who is pessimistic about the economy and hesitant to open the purse strings. Wages have been stagnant, which has hampered consumer spending. Inflation is stuck below 1 percent, well below the BoJ’s target of 2 percent. Tokyo Core CPI, the primary gauge of consumer inflation, edged down to 0.0%, below the estimate of 0.2%. The index has posted just one gain in the past 18 months, underscoring that despite the BoJ’s ultra-loose monetary policy, inflation levels remain well below the bank’s target of 2 percent.
The Federal Reserve has all but signed in writing that it would raise interest rates three times in 2017, but the markets are becoming more skeptical. The odds of a rate hike in December have fallen to 47%, down from 53% last week, according to the CME Group. With the US economy giving a mediocre performance in the first quarter, and inflation levels remains low, there are Fed policymakers who are currently lukewarm to the idea of raising rates again this year. Key economic indicators have not looked particularly sharp in the second quarter, notably housing and consumer spending numbers. If inflation numbers do not improve and GDP reports for Q2 remain soft, the odds of a December hike will drop even further, which could translate into broad losses for the US dollar.
