• Federal Reserve inflation policy provides late week fireworks.
  • Dollar falls as Fed announcement overshadows improving US data.
  • USD/JPY closes near its August low but remains within its four-week range.
  • Post-pandemic downtrend intact but moderating this month
  • PM Shinzo Abe resigns for health reasons, will stay until sucessor is chosen

The Federal Reserve’s policy announcement on Thursday provoked a violent reaction as the dollar snapped lower then recovered but the prospect of an ever lengthening term at the zero rate boundary drove the USD/JPY to its weakest close in a month on Friday.

Average inflation targeting as the Fed calls its new inflation guidelines would permit prices to rise above the 2% goal if necessary to balance an earlier period of weak performance.

Though the change had been expected markets responded by dropping the USD/JPY about 50 points to 105.60 in the first half hour then reversing and in the next 30 minutes pushing to the day’s high thus far at 106.31.  The pair climbed for the rest of the session closing in New York at 106.55.  Asia and then early Europe continued to 106.95 but with resistance at 107.00 firm weak support at 106.55 gave way at first pressure and the way lower was opened for the remainder of the London and New York markets.

The immediate implications of the Fed’s policy change are few.  Inflation in the core PCE gauge was just 1.3% in July, well below its 1.9% rate in February and far from the 2% target.  But PCE prices have been underperforming for more than a decade. Since the financial crisis only 2018 with an average rate of 1.96% came close to the goal and that was due more to the excellent economy that year than any residue from seven years of zero rates or four rounds of quantitative easing.

One purpose of the change was to eliminate the tight connection between low unemployment and inflation that had traditionally guided Fed policy. The FOMC is now free to focus and provide support for the labor market even if inflation runs above target for a considerable period.

Fed forward guidance has stressed the need for rate policy and fiscal support for the economy until the US is well clear of the effects of the pandemic closures.  While no duration of the emergency policies has been discussed the last Projection Materials in June had the fed funds rate unchanged to the end of 2022.  By limiting the inflation trigger this latest policy shift moves rate policy to lower rates for ever.

Japan and US statistics August 24-August 28

Japanese statistics were mostly limited to June and provided little new information or indication that a recovery is at hand.

The Coincident Index which summarizes all economic activity was revised to 76.6 from 76.4 and the Leading Economic Index was adjusted to 84.4 from 85.   The All-Industry Activity Index which tracks production changes rose 6.1% in June, much more than the 0.8% forecast and May’s 4.1% decline.

Tokyo inflation was weaker than predicted.  Overall CPI in August was 0.3% on the year, much less than the 0.8% prediction and half of July’s 0.6% rate. 

American economic information suggested the recovery is gathering strength but did not chronicle a breakthrough. 

The Richmond Fed manufacturing index jumped to 18 in August from 10 prior. It was the best reading since October 2018. The pandemic low was -54 in April.

New home sales soared 13.9% to an annualized rate of 901,000 in July from 791,000 in June for the highest since the housing bubble in May 2007.

Durable goods rose 11.2% in July, more than double the 4.3% prediction and have gained 36% in the last three months, reversing the 35% decline in March and April.  Non-defense capital goods, the business investment proxy, rose 1.9% as expected and the June result was revised to 4.3% from 3.3%.  Here also the 7.8% shutdown decline has been erased by the subsequent 7.8% increase.

Second quarter GDP was revised to -31.7% from -32.95 and the Atlanta Fed GDPNow third quarter estimate climbed to 28.9% from 25.6%.

Jobless claims for the week of August 21 were 1.006 million as forecast and continuing claims registered 14.535 million from 14.758 million the previous week.

Personal income for July gained 0.4%, much better than the 0.2% expected drop and June’s 15 decline.  Personal spending rose 1.9% beating the 1.5% estimate, and combined with the May and June readings at 16.6% has made up 85% of the 19.5% March and April decline.

Michigan consumer confidence for August was revised slightly higher to 74.1 from 72.8. The pre-Covid score was 101 in February and the low was 71.8 in April.

The core PCE price index was 1.3% year on year in July a bit higher than the 1.2% estimate and June 1.1% rate.  February was 1.9% and March 1.7%.

USD/JPY outlook

The Fed inflation policy revision focused market attention on the evolving central bank approach to the pandemic recovery and the long term prospect for rates. Its actual impact on policy will be limited and distant. 

The Fed had no more success in boosting inflation in the decade after the financial crisis than any other major central bank.  Rate increases and inflation are in prospect nowhere. If the Fed has made this official policy, it is not really a change just an admission. The same can and will be said for all other central banks.

With rate policy differentials between central banks and currencies largely obviated, comparisons will return to econometrics.  In that contest the US appears to be forging ahead but markets are unlikely to notice until the Covid threat is past and non-farm payrolls launches fireworks. 

Until then the post-panic downtrend will remain intact.   

Japan statistics August 24-August 28


US statistics August 24-August 28


Japan statistics August 31-October 4


US statistics August 31-October 4


USD/JPY technical outlook

The downtrend that has existed since the March market panic and whose boundaries tightened in July remains the USD/JPY operational picture.  The limited rebound from support at 105.30 augurs for another attempt next week.  The Fed's newly expressed rate hike reluctance is an admission of what is a universal central bank outlook.  Until markets are confident that the pandemic has run its course the return to economic comparison will be hesitant. The US economy will outperform in recovery as it usually does, but it will take time for markets to be confident trading on the success.  

The relative strength index at 43.00 is an weak vote for selling. The moving averages are all resistance lines with the 21-day at 106.05, the 100-day at 106.99 and the 200 day at 107.98. Support is weaker and less frequent than resistance and is perhaps the main reason the weak downtrend remains intact.

Resistance: 106.25; 106.60; 107.00; 107.60

Support: 105.30; 104.75; 104.00; 103.00

USD/JPY sentiment poll






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