Do Inflation Data and the Fed Minutes Support Stability?
Written by: Rania Gule, Senior Market Analyst at XS.com
The USD/JPY pair is currently experiencing stability after the sharp fluctuations it recently witnessed. In my opinion, this stability reflects the market’s reaction to recent developments in the monetary policies of both the United States and Japan. As of the start of Friday’s trading session, the pair is trading at 148.65, down by 0.28%. From my perspective, this slight decline reflects market relief after the recent losses suffered by the Japanese yen.
The events surrounding the U.S. Federal Reserve’s September meeting significantly impacted the movement of the dollar against the yen. This meeting was pivotal, as the markets were uncertain about the extent of the expected interest rate cuts. Ultimately, the Federal Reserve decided to cut rates by 50 basis points, which was not made unanimously.
The minutes of the meeting revealed some hesitation among members of the Federal Open Market Committee (FOMC), with some members preferring a gradual cut of only 25 basis points. This divergence in opinions indicates caution within the Fed regarding the pace of rate cuts, which could influence market expectations for the dollar’s future movement.
From a broader economic perspective, inflation in the United States will play a key role in guiding the Fed’s upcoming decisions. The September Consumer Price Index (CPI) report confirmed that inflation remains above expectations, with the overall inflation rate registering 2.4%, higher than expected. Core inflation, which excludes volatile items like energy and food, also rose. In my view, this data suggests that the Federal Reserve may find itself in a difficult position; despite some recent weakness in employment data, increasing inflationary pressures could limit its options for further rate cuts. These challenges complicate the outlook for the dollar’s movement against major currencies, including the Japanese yen.
On the other hand, the Bank of Japan (BoJ) maintains a relatively accommodative monetary policy compared to its U.S. counterpart. It seems to me that the BoJ is hesitant to raise interest rates, despite international pressure to address inflation and difficult economic conditions. Expectations indicate that the BoJ will keep interest rates in the range of 0-0.25% during its upcoming meeting at the end of October.
Meanwhile, the new Prime Minister, Shigeru Ishiba, is attempting to maintain a delicate balance in his stance on monetary policy, especially with early elections approaching. His cautious remarks about the need to raise interest rates reflect a desire to avoid any sudden moves that could negatively impact the markets before the elections.
From a fundamental analysis perspective, I believe the divergence in monetary policies between the U.S. and Japan is the primary driver of the USD/JPY pair’s movement. While the Federal Reserve faces increasing pressure to tackle inflation by gradually cutting rates, the Bank of Japan remains firm in its stance on keeping rates low. This difference in policy directions could support the strength of the dollar against the yen in the short to medium term. However, other factors must also be considered, such as economic and political developments in Japan, particularly with the upcoming elections.
It’s also worth noting that U.S. labour market movements play a significant role in determining the future of U.S. monetary policy, thus affecting the dollar’s movement. Recent employment reports have been weaker than expected, prompting some dovish Fed members to support larger rate cuts. However, with the relative improvement in the September nonfarm payroll report, the Fed may adopt a more cautious approach in upcoming meetings, with markets now expecting a less aggressive 25 basis point cut or perhaps a pause in November.
In contrast, Japanese monetary policy is likely to remain unchanged shortly. Japan’s reluctance to raise interest rates reinforces the likelihood of continued yen weakness against the dollar, especially given the clear gap in bond yields between the two countries.
In conclusion, the stability of the USD/JPY pair appears to be a temporary pause in a long trajectory of potential volatility. The significant divergence between U.S. and Japanese monetary policies, along with the economic challenges each country faces, will remain, in my view, key factors driving this pair’s movement in the future. While the dollar may continue to outperform the yen in the near term, unexpected inflation-related developments, employment, or politics could alter this trajectory and lead to unforeseen fluctuations.
Technical Analysis of Yen (USDJPY) Prices:
From a technical perspective, if the USD/JPY pair surpasses the 150 level, it could trigger a wave of yen selling, which may further harm Japanese households already struggling with inflation. The ruling Liberal Democratic Party is keen to avoid this scenario and has promised a stimulus package after the elections to ease the burden on consumers.
Let’s not forget that the Bank of Japan’s meeting on October 31st will be crucial. Updated inflation expectations could temper the outlook for an imminent rate hike, but the primary focus remains on the U.S. Federal Reserve and the upcoming U.S. elections. A Trump victory, known for his strict fiscal policies, could push the USD/JPY pair above the 150 mark, supported by rising 10-year bond yields. This would affect the technical outlook of the pair amidst its cautious stability.
On the daily chart, the USD/JPY pair is neutral to upward-biased after breaking key resistance levels such as the 50-day moving average (DMA) and entering the Ichimoku Cloud (Kumo). The momentum suggests that buyers are still in control, as indicated by the Relative Strength Index (RSI). It’s worth noting that the RSI is still far from the overbought zone, indicating that the pair could extend its gains.
If the USD/JPY pair manages to extend its gains beyond the August 15 high of 149.39, it will target the psychological resistance level at 150.00. Should the pair gain further strength, it may test the 200-day moving average at 151.39.
On the downside, the USD/JPY price needs to stabilize below its recent low, the October 8 low at 147.35. Once breached, the pair could test the bottom of the Ichimoku Cloud at 146.40 and 146.60, before reaching the key medium-term support at 145.50.
