USD/JPY – Dollar Firm As Markets Eye US Inflation Releases

The US dollar has posted slight gains on Monday, as USD/JPY trades in the mid-102 range late in the European session. On the release front, there is only one US release on Monday, NAHB Housing Market Index. The markets are not expecting any change from the previous release. Japan starts off the week with no releases on the schedule.

With the US continuing to suffer from low inflation levels, markets expectations have been low for key inflation indicators. On Friday, PPI, the primary gauge of inflation in the manufacturing sector, slipped to 0.1%, down from 0.4% a month earlier. This matched the estimate. Weak inflation is one reason why the Federal Reserve is in no rush to raise interest rates, as low inflation points to slack in the economy. On the manufacturing front, the Empire State Manufacturing Index plunged to 14.3 points, down from 23.6 points in the previous release. This marked a three-month low and was well of the estimate of 20.3 points.

On Thursday, US Unemployment Claims came in higher than expected. The indicator climbed to 311 thousand, marking a six-week high. The estimate stood at 307 thousand. Employment indicators are being closely scrutinized by analysts, as the strength of the labor market is one of the most important factors influencing the Federal Reserve regarding the timing of an interest rate hike. A rate increase is expected by mid-2015, but stronger economic data, especially on the employment front, could hasten a move by the Fed. Earlier in the week, JOLTS Job Openings hit its highest level in 13 years, although it too missed expectations.

Japanese GDP contracted in the second quarter by 1.7%, its first decline since 2012. The yen managed to shrug off the bad news, as the markets had expected this figure. Still, negative growth does not bode well for the Japanese currency, which continues to trade above the 102 line. Analysts are pointing to the April tax hike as an important contributor to the weak GDP figure, since it has dampened consumption and hurt growth.

July proved to be a rough month for Japanese manufacturing events, as three manufacturing indicators missed their estimates last week. On Thursday, Core Machinery Orders bounced back from a decline with a gain of 8.8%, but this was way off the forecast of 15.5%. Earlier in the week, Tertiary Industry Activity came in at -0.1%, short of the estimate of a 0.2% gain. Revised Industrial Production dropped 3.4% last month, its steepest fall since October 2012. The weak manufacturing numbers are another indication of weakness in the Japanese economy, which could drag down the yen.

USD/JPY 102.55 H: 102.57 L: 102.25