USD/JPY has posted gains on Wednesday. In the North American session, the pair is trading at 113.20. On the release front, US Factory Orders declined 0.8%, missing the forecast of -0.5%. Later in the day, the Federal Reserve releases the minutes of its June policy meeting. There are no major Japanese events on the schedule. On Thursday, the US releases three key indicators – ADP Nonfarm Payrolls, unemployment claims, and the ISM Non-Manufacturing PMI.
Bank of Japan policymakers have reason to smile, as the economy has rebounded in 2017. A stronger global economy has boosted exports and revived the manufacturing sector. Consumers and businesses are spending more, and GDP expanded at an annualized rate of 1.0% in the first quarter. The fly in the ointment? Inflation is stuck below 1 percent, well below the BoJ’s target of 2 percent. Tokyo Core CPI, the primary gauge of consumer inflation, edged down to 0.0%, below the estimate of 0.2%. The BOJ has implemented a radical accommodative monetary policy, but inflation levels remain well below the BOJ’s target of 2.0%. After a fruitless battle to raise inflation, the BoJ appears ready to raise a white flag (of sorts) and lower its inflation target when policymakers gather for a rate meeting on July 20. It remains to be seen to what extent the bank lowers the bar, but traders should be prepared for some volatility from the yen if the BoJ does adjust its inflation target.
Federal Reserve policymakers have consistently projected one final rate hike in 2017, but the markets remain skeptical. The odds of a December rate hike are pegged at only 50%, while the likelihood of an increase in September is just 18%. The US economy slowed down in the first quarter, and there are signs that Q2 will also be soft. Consumer spending, which comprises two-thirds of US economic growth, remains soft. Another sore point in the economy is inflation, which remains below the Fed’s target of 2%. In June, Fed Chair Janet Yellen shrugged off inflation worries, saying that she expected inflation to remain soft due to temporary factors. The dollar was broadly higher after the June rate statement, as Fed policymakers were surprisingly upbeat about the economy and dismissed concerns about low inflation levels. Traders should keep a close eye on the minutes, which could be a market-mover. Will the Fed minutes present a positive view of the US economy? If yes, the dollar could respond with gains.
