USD/JPY has started the week quietly, as the pair trades at the 110 level in Monday’s North American session. On the release front, there are no US economic releases. Later in the day, Japan will publish SPPI, which measures inflation in the corporate sector. The US will release two key indicators on Tuesday – CB Consumer Confidence and New Home Sales.
The Bank of Japan will release its monetary policy statement on Wednesday, and is expected to maintain interest rates at -0.10%. The negative rates are part of the BoJ’s ultra-loose monetary policy, which is expected to continue until inflation levels move closer to the central bank’s target of around 2 percent. Japan’s economy has improved in recent months, as a weak yen and stronger global demand have boosted exports and boosted the manufacturing sector. However, Japanese policymakers need to tread carefully, as Japan’s trade surplus has triggered sharp criticism from the US President Trump. The weak yen has also drawn Trump’s ire, as he recently called out Japan for manipulating its currency for trade purposes. Still, the most recent US Treasury Currency Report, did not name Japan as a currency manipulator. If the yen weakens and heads back towards the 120 level, the Japanese are likely to get an earful from Trump about unfair trade practices.
What’s next for Janet Yellen and Co.? The Federal Reserve has broadly hinted that it will gradually raise rates in 2017, but it’s unclear how many times Janet Yellen will press the rate trigger. Most analysts are expecting two more moves this year, but there have been calls from some Fed policymakers for three more hikes. However, soft retail sales and CPI numbers in March have made the Fed more dovish, and on Tuesday, the Atlanta and New York Federal Reserve lowered their outlook for US economic growth for the first quarter. The Fed can point to a labor market that is close to capacity as well as strong consumer confidence, but surprisingly, this has not translated into stronger consumer spending, a key driver of economic growth. Will the Fed raise rates in June? The CME Group shows the odds of a June hike have dropped to 50%, compared to 64% earlier in April.
