USD/JPY: Printing fresh lows on dovish FOMC Minutes

USD/JPY was offered in late London and met a low of 108.39 as the Greenback drops to test the parameters of the 97 handle. Federal Reserve's chairman, Powell, spoke before Congress and took a series of questions but the key takeaway is that the jobs data from last week which beat expectations have done little to change the Fed's outlook on the economy. What this means is that the next Fed meeting where a decision will be made on interest rates will be a live meeting and thus markets have stepped away from the Dollar again in anticipation of a rate cut. 

Analysts at ABN Amro have said that a 25 basis point cut is a done deal but a 50 basis point cut is unlikely. Bill Diviney, a Senior Economist, at ABN Amro explained that the Fed Chair Powell began his semi-annual testimony to Congress today with a very dovish prepared statement, seemingly aiming to quash the idea that the recent trade war truce and last Friday’s upside payrolls surprise might derail Fed easing.

"First, he restated the FOMC’s view from the June meeting that the Fed would ‘act as appropriate to sustain the expansion’, and that ‘the case for a somewhat more accommodative monetary policy had strengthened’ for ‘many’ FOMC members. He added that ‘since then (…) it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook’.

As well as reiterating that ‘inflation pressures remain muted’, meanwhile, he gave this a further dovish twist by saying ‘there is a risk that weak inflation will be even more persistent than we currently anticipate’. "

FOMC Minutes and key points

Meanwhile, we have had the release of the FOMC minutes. Prior to the Minutes, US Treasury yields were some 5bp lower and OIS forward pricing for a July rate cut has increased from 25bp to 31bp. The question is whether there will be a 50bp cut of which the Minutes may have given some further clarification tot he Fed's intentions. The DXY was down -0.42% into the Minutes with a low of 97.06 and was flat immediately after the release.

The minutes have essential repeated what Powell already said in his testimony earlier today.

• A rate is warranted in the near term.
• Could be appropriate if incoming data showed continued deterioration.
• Growth and inflation risks are now weighted to the downside. 

• Many Fed officials saw stronger rate cut case of mid-rising risks.
• Many Fed officials in June saw risks weighted to the downside.
• No decision was taken at the June FOMC on standing repo facility.
• Several officials didn't yet see a strong rate cut case.
• Many officials sought more Fed accommodation warranted near-term.
• A few Fed officials saw rate cut risking financial imbalances.
• Several officials sought near term cut as a cushion for shocks.
• Many saw inflation expectations inconsistent with 2% goal.
• Only a couple of Fed policymakers favoured cutting interest rates at June meeting.
• Many participants said growth and inflation risks had shifted notably in the weeks ahead of the meeting and were now weighted to the downside.
• Officials focused on global risks and discussed at some length salt business investment data from the 2nd quarter.

Trade wars

Meanwhile, global markets stay focused on the trade war between the US and China, and also, trade tensions have also been rising between Japan and Korea. "Japan is restricting the trade of tech goods to South Korea, and a tit-for-tat response is expected. Japan has removed South Korea from its ‘white list’ of countries that it deems to have trustworthy export controls. Tension between the Japanese Prime Minister, Shinzo Abe, and the South Korean President, Moon Jae-in, increased after last month’s G20 summit and look set to intensify further. Both leaders won’t want to lose face ahead of upcoming elections, but they may find they are pressured by their people to quietly resolve their differences due to the potential impact on their economies," the analysts at ABN Amro explained. 

USD/JPY levels

A key week reversal from its 2015-2019 downtrend is negative and analysts at Commerzbank's Target is at 105.00/104.00.