USD/JPY pares losses to trade around 103.50 as attention turns to the FOMC

• USD/JPY has pared back from lows of the month in the 103.20s to trade just above 103.50.
• Progress reportedly being made on US fiscal stimulus but FX markets are tentative ahead of Wednesday’s FOMC meeting at 19:00GMT.

USD/JPY fell to fresh monthly lows in the 103.20s in earlier trade, but has since paired losses amid a mild recovery in USD from lows (DXY is back in the 90.20s having eyed a test of 90.00), with this mild buck recovery coming despite softer than expected US retail sales numbers for November, as well as downbeat services Markit PMI numbers for December.

USD/JPY trades with mild losses of around 0.1% or 10 pips on the day, in fitting with a broader tentative feel in FX, equity and commodity markets (USD/CHF, AUD/USD and NZD/USD are all also trading broadly flat on the day, as are US equities while crude oil is a little lower). Despite positive news on the US fiscal stimulus (Senate Majority Leader Mitch McConnell just said that “major headway” towards a deal has been made and sources say that ), markets seem tentative ahead of Wednesday’s FOMC monetary policy announcement at 19:00GMT.

USD/JPY firmly focused on key market themes

USD/JPY price action has largely ignored a recent dump of data from both Japan and the US, the pair instead seemingly much more focused on alternative market themes such as US fiscal stimulus talks and Wednesday’s FOMC monetary policy announcement which occurs later in the day.

Regarding the former; a source familiar with the state of US Congressional negotiations regarding further Covid-19 aid has suggested that the Democrats and Republicans are “closing in” on a $900B bill that would include a new round of stimulus checks. Moreover, the bill will include extended unemployment benefits, as well as “other avenues” for aid to State and local governments (which has been a key Democrat demand). Sources say that the bill is not likely to include corporate liability provisions (a key Republican demand). Meanwhile, Republican Senate Majority Leader Mitch McConnell recently said that Congressional leaders have made major headway in working towards a Covid-19 aid deal.

Regarding the latter; markets seem tentative ahead of Wednesday’s FOMC meeting where the bank is expected to hold fire on interest rate, but may provide some guidance regarding the duration of its asset purchase programme, or even tweak the composition of this programme. However, analysts note that given that Congress seems on the cusp of agreeing on fiscal aid, the bank has the room to hold fire on any policy changes and opt for patience.

Japan, US data dumps largely ignored

Both Japan and the US have both released a large amount of economic data over the last 24 hours. Starting with Japan; November trade numbers released during Wednesday’s Asia session underwhelmed, with the YoY rate of export growth coming in at -4.2% (expected was +0.5%) and the YoY rate of import growth coming in at -11.1% (expected was -10.5%). As a result of the larger mess on expectations for exports compared to imports, Japan’s November trade surplus came in lower than expected at JPY 366.8B (expected was JPY 529.8B), down from a surplus of JPY 871.7B in October. Preliminary Manufacturing PMI numbers for December was a little less pessimistic, however, rising to 49.7 from 49.0 versus the expected drop to 48.9.

Looking ahead, JPY traders will not have to worry about any more domestic economic events until Friday’s November national CPI release and BoJ rate decision, where the bank may cite fresh economic fears based on the Covid-19 resurgence in Tokyo, coupled with the December Tankan Survey of Enterprises in Japan, to stretch its corporate aid package by six months beyond the current deadline of March 2021.

Moving on to the US; the main data release of note on Wednesday was November Retail Sales numbers at 13:30GMT. Headline Retail Sales dropped 1.1% (versus expectations for a drop of 0.3%) and Core Retail Sales dropped 0.9% (versus expectations for a 0.1% rise), while the Control group (which gives a better indication as to consumer spending within the quarterly GDP report) dropped 0.5%, worse than expectations for a rise of 0.2%. Control group retail sales have now been negative two months in a row; a third negative number in December will raise the risk that Q4 GDP growth in the US has been negative. The data showed that the US economy is hurting as a result of rising Covid-19 cases and associated economic restrictions.

Meanwhile, preliminary December US Markit PMI numbers released at 14:45GMT made for slightly less pessimistic reading; manufacturing PMI only fell slightly to 56.5 from 56.7 in November, less than the expected drop to 55.7. However, services PMI was hit harder than expected, dropping to 55.3 from 58.4 versus expectations for a drop to 55.9.

Looking beyond Wednesday’s FOMC meeting, USD traders will have their eyes on weekly jobless claims, building permits (Nov) and the Philly Fed manufacturing index (Dec), all released at 13:30GMT on Thursday, as well as any post-FOMC Fedspeak.