USD/JPY has started the week with losses. In the Tuesday session, USD/JPY is trading at 112.11, down 0.51%. On the release front, there are no Japanese events on the schedule, and Japanese bank are closed for a holiday. In the US, today’s sole event was Final Manufacturing PMI, which climbed to 55.1, edging above the estimate of 55.0 points. This marked the highest level since March 2015. On Wednesday, the FOMC will publish the minutes of its December meeting, and we’ll get a look at ISM Manufacturing PMI.
Japanese inflation indicators continue to point upwards. The final Japanese event of the year was Bank of Japan Core Inflation, which the BoJ relies on to measure inflation. The indicator climbed 0.6%, edging above the estimate of 0.5%. This marked a 3-month high. Earlier last week, other inflation indicators also beat their estimates, underscoring that inflation is on the move. Still, the BoJ has made it abundantly clear that it will not tighten its ultra-accommodative monetary policy until inflation is close to the Bank’s 2 percent inflation target. The minutes of the October meeting indicated that most members favored a continuation of the current ultra-accommodative policy. This could weigh on the yen, as other central banks, such as the ECB, the Federal Reserve and the Bank of Canada have tightened policy in recent months, widening divergence with the Bank of Japan.
Traders can expect the Federal Reserve in the headlines a fair amount early in the New Year. Investors will be monitoring the Fed on Wednesday, with the release of the minutes of the December meeting. At that meeting, the Fed raised rates by 25 basis points, to a range between 1.25% and 1.50%. The hike marks a vote of confidence in the US economy, and if the minutes are hawkish, the US dollar could gain ground. If the US economy continues to expand at a clip exceeding 3%, the Fed is expected to raise rates up to four times in 2018. Currently, the CME Group has priced in a January rate hike at 98.5%. Although inflation remains well below the Fed target of 2.0%, outgoing Fed Chair Janet Yellen and other FOMC members have said that they expect that the strong labor market will lead to higher inflation. Although this is yet to materialize, of significance to the markets is the commitment of the Fed to press ahead with rate hikes, despite low inflation
