USD/JPY has posted small losses on Thursday. In North American trade, the pair is trading at 112.63, down 0.15% on the day. In the US, Final GDP impressed with a 3.1% gain, above the forecast of 3.0%. Unemployment claims jumped to 272 thousand, higher than the estimate of 269 thousand. Later in the day, Japan releases Household Spending and Tokyo Core CPI, two key indicators that could move the yen. On Friday, the US releases Personal Spending and UoM Consumer Sentiment.
The BoJ has no plans to adjust its ultra-accommodative policy, and this was reiterated in the minutes of the Bank’s August policy meeting. Most policymakers remained in favor of continuing present policy, and expressed optimism that inflation levels would move higher. Is there a real basis to this positive sentiment? Inflation remains well short of the BoJ target of just below 2 percent, and in its most recent forecast, the BoJ said that this target would not be met until 2020. Still, the BoJ has so far rejected calls to lower its inflation target, so it’s unlikely that the Bank will taper its radical stimulus program anytime soon. On Thursday, BoJ Governor said that with the economy continuing to expand, he expects inflation to move closer to the BoJ’s inflation target of just below 2.0%.
What can we expect from the Federal Reserve with regard to interest rate policy? Fed policymakers remain divided on the hot issue of a third and final rate hike in 2017. Fed Chair Janet Yellen waded into the rate debate on Tuesday, as she sent out a surprisingly hawkish message to the markets. Yellen said that she favored gradual rate increases, and voiced confidence that inflation levels would move higher. She added that if the Federal Reserve did not continue to raise rates, the red-hot labor market could become overheated, potentially causing a recession. Yellen appeared to echo sentiments voiced by New York Fed President William Dudley, who made a strong case for raising rates on Monday. Dudley cited a soft US dollar and strong global growth as reasons why inflation would increase and also translate into stronger wage growth. Dudley said he expects inflation to reach the Fed’s target of 2 percent in the "medium term", and predicted that the Fed would continue to gradually remove monetary accommodation. However, Chicago Fed President Charles Evans sent out a very different message, calling on the Fed to avoid another rate hike until wage and inflation levels moved higher. Evans said that inflation, which is running at around 1.4 percent, is too low, and wants to see "clear signs" that prices are moving higher before the Fed presses the rate trigger. For their part, the markets are more confident in a December move – according to the CME Group, the odds of a December hike are priced in at 76%, while the odds were mired below 50% just a few weeks ago.
