USD/JPY is showing little movement in the Wednesday session, after starting the week with losses. In North American trade, USD/JPY is trading at 112.37, up 0.07%. On the release front, the first major US indicator in 2018 pointed higher. ISM Manufacturing PMI improved to 59.7, beating the forecast of 58.3 points. This marked a 3-month high. Today’s key event is the release of the Fed minutes from the December meeting. On Thursday, the focus is on employment numbers, with the release of ADP Nonfarm payrolls and unemployment claims. On Friday, we’ll get a look at wage growth and US Nonfarm Payrolls.
As we begin the New Year, what can investors expect from the Bank of Japan? BoJ Governor Haruhiko Kuroda has generally stuck to his script that the Bank will maintain its massive stimulus program until inflation rises, but there have been subtle hints form Kuroda that he could change course, if the economic rebound which marked 2017 continues. The stimulus program has failed to lift inflation above 1%, well below the BoJ inflation target of around 2%. Some analysts expect a ‘stealth tapering’, whereby the BoJ would reduce asset purchases and tighten policy, but in small, incremental steps. In this way, the BoJ could change its monetary stance, while minimizing market volatility.
The Federal Reserve will be on center stage on Wednesday, with the release of the minutes of the December policy meeting. At that meeting, the Fed raised rates by 25 basis points, to a range between 1.25-1.50%. The hike marks a vote of confidence in the US economy, and if the minutes are hawkish, the US dollar could gain ground. The economy is expanding at an impressive clip of above 3 percent. If this pace continues, the Fed could raise rates up to four times in 2018. Currently, the CME Group has priced in a January rate hike at 98.5%. Despite the rosy economic conditions, inflation has been chronically soft, well below the Fed target of 2 percent. Outgoing Fed Chair Janet Yellen and other FOMC members have said that they expect that the strong labor market will push up wages and trigger higher inflation, but this is yet to happen.
