USD/JPY Fundamental Weekly Forecast – Fed Speeches, US Inflation Data Set the Tone This Week
The Dollar/Yen closed lower last week following a setback in U.S. Treasury yields after a number of central banks, led by the U.S. Federal Reserve, struck a dovish tone on interest rates.
Last week, the USD/JPY settled at 113.398, down 0.567 or 0.50%.
Dovish Central Banks Underpin Japanese Yen
Last Tuesday the Reserve Bank of Australia (RBA) dampened investor hopes for a hawkish pivot, kicking off a big week for monetary policy that included decisions from the Federal Reserve and Bank of England.
The RBA stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.
The Federal Reserve on Wednesday stuck to its view that inflation would prove “transitory” and would likely not require a fast rise in interest rates. Following that on Thursday, the Bank of England surprised markets by keeping rates on hold.
Japanese Policymakers Reaffirm BOJ’s Commitment to 2% Inflation Target
Japanese policymakers last Tuesday reaffirmed the Bank of Japan’s (BOJ) commitment to is 2% inflation target in a meeting held between the central bank chief and the country’s economy and finance ministers.
The Japanese government and the central bank also agreed to keep in close contact and cooperation, in line with commitments made in a 2013 joint statement, which also laid out the country’s inflation target for the first time.
“The most important issue was to reaffirm the joint statement,” Economy Minister Daishiro Yamagiwa told reporters after the meeting.
“The government and the BOJ must keep close contact with each other. The BOJ aims to achieve the 2% price stability target while we proceed with economic growth strategy.”
Japan’s Kishida Defies Expectations as Ruling LDP Easily Keeps Majority
Japanese Prime Minister Fumio Kishida’s ruling LDP defied expectations and held its strong majority in Sunday’s parliamentary election, solidifying his position in a fractious party and allowing him to ramp up stimulus.
The limited reaction to Friday’s strong U.S. Non-Farm Payrolls report shows investors believe one solid report is not going to change what Federal Reserve Chair Jerome Powell signaled in his post-policy meeting press conference.
Nonetheless, with the Fed not scheduled to meet until December, the near-term focus will be on U.S. economic data and Fed member speeches.
This week, Fed Chair Powell will give speeches on Monday and Tuesday. Traders are hoping he’ll reveal more about the timing of the first post-pandemic rate hike. Although he’s not likely to waiver much from last week’s dovish tone.
The economic reports include the monthly Producer Price Index (PPI) and the monthly Consumer Price Index (CPI). PPI is expected to continue to climb with traders pricing in a reading of 0.6%, up from 0.5%. CPI is expected to rise 0.5%, up from 0.4%. Core CPI is expected to show a 0.4% increase, up from 0.2%.
The Fed threw its weight back behind the drive for a full U.S. jobs recovery last Wednesday, restating its belief that current high inflation is “expected to be transitory” and despite risks to that view, arguing that price pressures will ease and pave the way for stronger employment and economic growth in the months to come.
The first test of this assumption will come on Tuesday with the PPI data and on Wednesday with the CPI report.