USD/JPY continues to have an uneventful week. In North American trade, the pair is trading at 110.50, up 0.14% on the day. In Japan, Consumer Confidence improved to 43.8 points, beating the estimate of 43.5 points. In the US, ADP Nonfarm Employment Change rebounded with a reading of 178 thousand, but this was short of the forecast of 187 thousand. On Thursday, the US releases two key events – unemployment claims and ISM Non-Manufacturing PMI.
The Japanese consumer remains pessimistic about economic conditions, although Consumer Confidence did move higher in July, with a reading of 43.8 points. This marked a 4-month high. The lack of confidence in the economy has resulted in soft borrowing and spending levels. At the same time, manufacturing and housing indicators looked sharp earlier this week. Preliminary Industrial Production rebounded with a strong gain of 1.6%, after a decline of 3.3% in the May. As well, Housing Starts gained 1.7%, compared to a reading of -0.3% in May. These numbers underscore a stronger Japanese economy, buoyed by stronger demand for Japanese exports. However, weak inflation levels remain a serious concern. The BoJ’s ultra-loose monetary policy has failed to coax inflation upward. At its recent policy meeting, the BoJ again extended its time-frame for reaching its inflation target of 2%. The bank is reluctant to scale back its asset-purchase program, which means that it will likely lag behind other central banks, such as the ECB, in reducing its stimulus program.
The US dollar has softened against its rivals, and even a strong gain from US Advance GDP last week failed to stem the greenback’s slide. The first GDP report for the second quarter came in at impressive 2.6%, beating the estimate of 2.5%. This strong expansion should put to rest concerns of a second straight quarter of weak growth – Final GDP came in at just 1.4%. Still, EUR/USD soared in July, gaining 3.5%. Investors remain concerned that low inflation in the US could mean that the Fed will balk and not raise interest rates in December, despite all but promising to increase rates three times in 2017. In June, Fed Chair Janet Yellen dismissed low inflation as "transient", but she has since changed her tune, as economists remain at a loss to explain why a red-hot economy has not translated into stronger wage growth, and hence higher inflation. The markets are skeptical about a December hike, with the odds at just 42%, according to the CME Group.
