Today’s market analysis on behalf of Rania Gule Market Analyst at XS.com
The Japanese Yen remained stable at 157.41 following the release of the latest inflation data on Friday. Japan’s National Consumer Price Index (CPI) for June held steady at 2.8%, remaining at its highest level since February. Meanwhile, the core consumer inflation rose to 2.6%, slightly above the previous reading of 2.5% but just below the estimate of 2.7%. The yield on the 10-year Japanese government bond is trading around 1.04%, recovering from its three-week lows. I believe this recovery came after Japanese Minister Taro Kono stated that the Bank of Japan should raise interest rates again in July to support the yen.
The Bank of Japan is also expected to present its plans to reduce bond purchases this month. The USD/JPY pair has dropped by about 4% from its 38-year high of 161.95 recorded in July, due to interventions by Japanese authorities, with the market anticipating the possibility of more interventions. At the same time, the strength of the US dollar is supported by improved US Treasury yields, despite weak labor data and market expectations of a rate cut by the Federal Reserve in September. In my view, this could cause some consolidation or fluctuation in the pair’s price in the near term.
Japan’s total merchandise trade balance for the year ending in June rose to a surplus of 224 billion yen, compared to an expected deficit of 240 billion yen and a previous deficit of 1,220.1 billion yen. Federal Reserve Governor Christopher Waller said on Wednesday that the US central bank is “close” to cutting interest rates. Japanese Currency Minister Masato Kanda also stated that he would have to respond if speculators caused “excessive” movements in the currency market, and there is no limit to the number of times authorities can intervene. Therefore, I believe the downward trend in the USD/JPY pair will continue, especially if expectations of a Federal Reserve rate cut in September remain strong, as this would mean strength for the yen and weakness for the dollar in the medium term.
Politically, former US President Donald Trump warned Federal Reserve Chairman Jerome Powell against cutting US interest rates before the presidential elections in November. However, Trump also indicated that if re-elected, he would allow Powell to complete his term if he continues to “do the right thing” at the Federal Reserve. This makes the Federal Reserve’s interest rate expectations somewhat unclear, possibly continuing to support the strength of the US dollar in the short term.
This comes after Federal Reserve Chairman Jerome Powell mentioned earlier this week that the three inflation readings in the US this year “add some confidence” that inflation is on track to sustainably meet the Federal Reserve’s target, suggesting that a shift to rate cuts may not be far off. In my opinion, this explains some of the fluctuations and instability in the pair’s trading, likely leading to some consolidation until new drivers emerge to help determine the price momentum in the medium and long term.
