USD/JPY is showing little movement in the Wednesday session. In the North American session, the pair is trading at the 112 line, up 0.07% on the day. On the release front, the Japanese Services Producer Price Index edged up to 0.8%, matching the forecast. In the US, New Home Sales remained steady at 610 thousand, short of the estimate of 615 thousand. Later in the day, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. On Thursday, the US will release two key indicators – Unemployment Claims and Core Durable Goods Orders. Japan will release a host of inflation indicators, led by Tokyo Core CPI. The indicator is expected to post a small gain of 0.1%.
The Bank of Japan minutes from the June meeting revealed a split among members as to how much information the bank should disclose regarding a potential withdrawal from its quantitative easing program. Some policymakers were in favor of full disclosure about the bank’s plans, while others said that publicizing information about an exit too soon could lead to market volatility. As expected, the BoJ maintained its ultra-loose policy, but there was an unexpected development, as the bank revised upwards its forecast for consumer consumption, for the first time in six months. An additional complication for policymakers is that the BoJ is now trailing other central banks with regard to tightening monetary policy – the Federal Reserve and Bank of Canada recently raised rates, and the ECB and BoE are contemplating tighter policy. If the BoJ continues to lag behind the other central banks, the yen could lose ground against other currencies.
All eyes are on the Federal Reserve, which concludes its monthly policy meeting later on Wednesday. The Fed is not expected to alter its interest rate policy, but the rate statement could still be a market-mover. The rate statement will be under careful scrutiny, as analysts will be looking for any references to the "I" word. Inflation continues to hover around 1.4% (based on the Fed’s calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as "transitory", but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today’s rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Aside from interest rates, Fed members will be discussing when to commence tapering the Fed’s $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
