The Dollar/Yen is trading lower early Wednesday as mixed U.S. data and caution ahead of a two-day Federal Reserve meeting encouraged long dollar investors to square positions. Trading volume was muted by Japanese markets being closed for the Golden Week holiday. Activity is expected to drop off further on Wednesday when China and much of Europe will be off for the May Day holiday.
At 01:00 GMT, the USD/JPY was trading 111.410, down 0.0035 or -0.04%.
Early Tuesday, the Japanese Yen rallied to a three-week high after China’s official Purchasing Managers’ Index dipped to 50.1 April.
In the U.S. later in the day, data showed U.S. labor costs grew 0.7% in the first quarter, reinforcing the notion that wage pressure would stay tame even though hiring has remained strong, the Labor Department said.
Additionally, U.S. Midwest factory activity fell in April to its weakest since January 2017, according to an index from MNI and the Institute for Supply Management-Chicago.
Daily Forecast
Early Wednesday, investors will get a chance to react to a slew of U.S. economic reports before the Fed releases its decisions. These reports include ADP Non-Farm Employment Change, Final Manufacturing PMI, ISM Manufacturing PMI, Construction Spending, ISM Manufacturing Prices and Total Vehicle Sales.
The major report is ISM Manufacturing PMI. It is expected to come in at 55.0, well above the 50.0 level which indicates expansion or contraction, but lower than the previously reported 55.1.
On Wednesday at 18:00 GMT, the Fed is expected to be the catalyst that drives Treasury yields and hence, the direction of the USD/JPY. The central bank is largely expected to keep rates unchanged, but investors will look for clues about where the central bank thinks the economy is headed.
Expectations for a rate cut at this meeting are just at 4%, according to the CME Group’s Fed Watch tool. But the market has fully priced in lower overnight rates by October, Fed Watch shows.
The key issue for Fed policymakers will be how to explain the perceived disappearance of the trade-off between unemployment and inflation.
A dovish Fed will be bearish for the USD/JPY. If the Fed turns slightly hawkish, then look for yields to rise which would make the dollar a more attractive investment.