- USD/JPY stays below 145.00 with US core PCE inflation on the horizon.
- Global market sentiment appears to be asset-specific.
- The BoJ is expected to raise interest rates again this year.
The USD/JPY pair trades sideways below the crucial resistance of 145.00 in Thursday’s European session. The asset struggles for direction as investors await the United States (US) Personal Consumption Expenditure inflation (PCE) report for July, which will be published on Friday.
Global market action appears to be asset-specific as risk-sensitive currencies have faced sharp selling pressure, while S&P 500 futures have posted significant gains in European trading hours. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its recovery above 101.20.
The US PCE inflation is expected to drive the next move in the US Dollar (USD) as it would influence market speculation for the Federal Reserve’s (Fed) September policy meeting. According to the CME FedWatch tool, the Fed is certain to pivot to policy-normalization in September but traders remain split over the likely size of interest rate cuts. 30-day Federal Funds Futures pricing tool shows that the likelihood of a 50 basis points (bps) interest rate reduction is 34.5%, while the rest favors a 25 bps.
In today’s session, investors await revised estimates for Q2 Gross Domestic Product (GDP) and Initial Jobless Claims data for the week ending August 23. Investors will keenly watch the jobless claims data as the Fed is now more concerned about deteriorating labor market strength.
DID THE MOF INTERVENTIONS WORK? – COMMERZBANK
On Wednesday, US economist Brad Setser argued in the Financial Times that the interventions by the Japanese Ministry of Finance (MOF) in favor of the yen were very effective, regardless of the monetary policy of the Bank of Japan (BoJ). Time to roll up the stones again, then, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.
JPY depends on the fundamentals
“The interventions have not had any lasting effect on JPY exchange rates so far. The MOF repeatedly let earlier intervention levels slip away. Their effect on USD/JPY only became sustainable when they were accompanied by idiosyncratic USD weakness and, in particular, when it became foreseeable that the BoJ's monetary policy would turn.”
“Most of the MOF's foreign exchange reserves may have been purchased at much lower USD/JPY rates.The MOF makes a profit from interventions if they are successful, i.e. if USD-JPY trades sustainably lower due to the interventions. Otherwise, it makes a loss.”
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