USD/JPY Fundamental Daily Forecast – Don’t Expect Any Surprises in Fed Minutes

The Dollar/Yen is inching higher on short-covering ahead of the release of the minutes from the U.S. Federal Reserve’s most recent meeting at 18:00 GMT on Wednesday. Investors don’t expect any surprises from the minutes with most expecting central bank policymakers to reiterate that a rate hike is still in the distance.

At 07:29 GMT, the USD/JPY is trading 109.022, up 0.120 or +0.11%.

Investors will also be looking at the minutes for the Fed’s opinion about inflation although the meeting the minutes are based on occurred before the release of the most recent consumer inflation report.

Data last week showed U.S. consumer prices rose 4.2% in April from a year earlier, which was the fastest increase in more than a decade. The news stunned investors, who drove Treasury yields and the Dollar/Yen sharply higher, but Fed officials calmed investors by reiterating that the spike in inflation was only temporary. Treasury yields and the dollar retreated on the news.

BOJ to Consider Extending Pandemic Relief as Needed, Kuroda Says

The Bank of Japan (BOJ) will consider extending the current September deadline for its pandemic-relief program if necessary. Governor Haruhiko Kuroda said as the country struggles with a spike in COVID-19 infections that is crippling the economy.

Mr. Kuroda said the world’s third-largest economy remains on a path toward recovery as robust exports and corporate profits offset some of the pandemic’s damage to consumption. But he warned that there was high uncertainty on the pace of vaccine rollouts and other risks.

“For the time being, risks to Japan’s economic outlook are skewed to the downside,” Mr. Kuroda said in a speech delivered at a seminar on Wednesday.

“Taken into account the impact of the pandemic, we will consider extending further” the deadline for the BOJ’s measures to ease corporate funding strains caused by the crisis, he said.

Japan GDP Shrinks Annualized 5.1% in Q1

Japan’s economy declined 1.3% in January-March from the preceding three-month period, or an annualized pace of decline of 5.1%, as resurgent COVID outbreaks snapped the run of consecutive growth after two quarters, the Cabinet Office said Tuesday.

The result compares with an average forecast of a 1.2% contraction, or an annualized decline of 4.6%, in a survey of 37 economists by the Japan Center for Economic Research.

Daily Outlook

USD/JPY investors won’t be influenced by the Fed minutes per se, but rather its impact on Treasury yields. Most investors believe the Fed will maintain the view that rising inflation is transitory, despite market nervousness about sustained price pressures.

Atlanta Fed President Raphael Bostic told CNBC on Monday that the central bank needed to keep its monetary price policy “very strongly accommodative” in order to close the gap in unemployment.

Also on Monday Dallas Fed Bank President Robert Kaplan said the Fed would want to “telegraph” any plans to trim back asset purchases in order to give the market plenty of notice.

The last Fed meeting was two weeks ago so if the Fed were considering any major changes to policy, it would’ve “telegraphed” the move in April. So don’t expect much of a reaction to the minutes unless the Treasury yields make a notable move.