USD/JPY is eyeing its support level at 152 into today’s Bank of Japan meeting. The market’s conviction for breaking below this level hinges on the BOJ’s resolve to normalise monetary policy. Apart from reducing its purchases of JGBs, which we reckon will halve to JPY3 trillion a month, the market wants the BOJ to lift rates by 15 bps to 0.25%. The Kishida Cabinet is keen to arrest the JPY’s weakness, which it blamed for pummelling its approval ratings by adding to the consumer’s cost of living crisis and hurting small and midsize companies via higher raw and energy prices. Today provides a rare opportunity for Japan to tackle the JPY through monetary policy because of the dovish expectations for the FOMC meeting.
The DXY Index was barely changed at 104.55 before today’s FOMC meeting. During the overnight session, the DXY briefly hit 104.80, near the level it fell on July 11 due to the softer US CPI inflation. The Fed should leave the door ajar to lower interest rates without endorsing the futures market’s aggressive bet (110% probability) on a September cut until it sees the US unemployment rate data on August 2 and the CPI inflation data on August 14. Suppose the Fed gains more confidence about inflation resuming its decline towards its 2% target or worries more about rising joblessness, it will likely provide the timing guidance at the Kansas City Fed’s Jackson Hole Symposium on August 24-26.
Meanwhile, the S&P 500 Index fell 0.5% to 5436, stuck in a 5400-5500 range for the fifth session. The Nasdaq Composite Index fell more by 1.3% to 17147, near last Thursday’s low. Investors did not cheer the Conference Board’s consumer confidence index’s rise to 100.3 in July; the Board revised June sharply to 97.8 from 100.4. More importantly, the present situation index fell to 133.6 (its worst reading since April 2021), and June also lowered to 135.3 from 141.5. For the sixth month, the expectations index held below 80, the threshold that usually signals a recession ahead. The Fed should take heart from more consumers planning to reduce services spending, most likely from their weaker assessments of the business conditions and the labour market.
There are a few ways today’s BOJ-FOMC meetings could play out. A firm signal from the Fed to start lowering rates soon should send the USD lower across the board. If not, the unwinding of JPY carry trades (still large according to CFTC data) could resume on a resolute BOJ. Hence, please pay attention to today’s CPI inflation data in the EU and Australia and tomorrow’s expected rate cut by the Bank of England. On a final note, BOJ Governor Kazuo Ueda could disappoint again by flagging a rate hike at the next meeting instead. Today’s session will likely be volatile.
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