USD/JPY extends decline below 145.50 on Fed rate cut hopes, softer US Dollar
- USD/JPY weakens to 145.35 in Wednesday’s Asian session.
- Higher expectations of a Fed rate cut in September undermine the USD.
- The advanced US August S&P Global PMI will be due on Thursday ahead of Fed Chair Powell’s speech.
The USD/JPY pair trades in negative territory near 145.35 for four consecutive days during the early Asian session on Wednesday. The softer US Dollar (USD) and expectation of a dovish message from Federal Reserve (Fed) Chair Jerome Powell at Jackson Hole drag the pair lower.
Investors are confident that the US Fed will cut interest rates this year, expecting three quarter-point Fed cuts in September, November and December. This, in turn, exerts some selling pressure on the Greenback. Some officials said a half-point Fed rate cut in September could not be ruled out if there were signs of a further slowdown in hiring.
Minneapolis Fed President Neel Kashkari said on Monday he would be open to cutting US interest rates in September because of the rising possibility that the labor market weakens too much. “The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have,” said Kashkari.
Meanwhile, Fed Governor Michelle Bowman said on Tuesday that she remains cautious about any shift in the policy because of what she sees as continued upside risks for inflation. She warned that overreacting to any single data point could jeopardize the progress already made.
The preliminary US S&P Global PMI for August will be due later on Thurday. If the report shows a better than expected outcome, it could cap the downside for the USD. On Friday, Fed Chair Powell's speech at the Jackson Hole symposium will be in the spotlight.
On the JPY’s front, data released by the Ministry of Finance of Japan showed on Wednesday that the country’s trade balance shrank more than expected in July as prices of imports rise. Trade balance fell to a deficit of 621.8 billion yen, compared to 224 billion yen surplus in June, weaker than expectations for a deficit of 330.7 billion yen. Additionally, Exports grew 10.3% YoY in July, below the consensus of 11.4% growth. Imports increased 16.6% YoY in July from the 3.2% seen in June, beating estimation for a rise of 14.9%.
A record Japan’s trade deficit could likely weigh on the Japanese Yen and limit the USD/JPY’s downside in the near term. Looking ahead, traders will take more cues from the Japan’s National Consumer Price Index (CPI) for July, which is due on Friday.
(This story was corrected on August 21 at 01:30 GMT to say in the article, that the advanced US August S&P Global PMI will be due on Thursday, not on Wednesday.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
