BOJ warns speculators as Yen slides

Important calendar events

• JPY: Average Cash Earnings, Monetary Base
• EUR: French Trade Balance, Spanish, French, Italian, and German Services PMI, EU Final Services PMI
• GBP: BRC Retail Sales Monitor, Final Services PMI

USD

The dollar dipped on Monday, with the dollar index dropping to 104.1. US Treasury yields remained the same as Monday was a Bank Holiday in the US, with the US 10-year bond yielding 4.18%. US markets were slow on Monday due to the Labor Day holiday and the dollar traded with low volatility.

The dollar is expected to be driven in the next few weeks by Fed rate hike expectations. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. 

Federal Reserve Chair Jerome Powell, recently speaking at the Jackson Hole Symposium in the US, warned that the Fed is prepared to raise interest rates further to bring inflation down. The Fed’s aggressively hawkish policy over the past year has been paying off and inflationary pressures in the US are easing. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently. 

Headline inflation rose to 3.2% in July from 3.0% in June, versus the 3.3% forecast, indicating that inflationary pressures are not decreasing consistently. US monthly CPI and Core CPI, which excludes food and energy, both rose by 0.2% in July. PPI, and Core PPI, also increased more than expected in July, both rising by 0.3%, against estimates of a 0.2% growth. 

Core PCE Price Index, which is the Fed’s preferred inflation gauge, fell within market expectations last week. Core PCE remained high, rising by 0.2% monthly in July, bringing the annual rate to 4.2%.

Prolonged economic tightening has put considerable strain on the US economy. Preliminary GDP for the second quarter of 2023 showed that the US economy expanded by only 2.1% against expectations of 2.4% growth. The preliminary GDP price index for the 2nd quarter of the year also came in below expectations at 2.0% versus 2.2% anticipated.

Several FOMC members are due to deliver speeches throughout the week, which may affect the dollar. Market participants are expected to follow FOMC members’ addresses closely for hints into the Fed’s future policy direction.

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EUR 

EUR/USD traded sideways on Monday with low volatility oscillating around the 1.079 level. If the EUR/USD pair declines, it may find support at 1.066, while resistance may be encountered near 1.094. 

Economic activity data released on Monday for the Eurozone were weak, putting pressure on the Euro. German balance of trade showed that exports are slowing in the eurozone’s largest economy. German trade balance dropped to 15.9B in July from 18.8B in June, falling short of expectations of a 17.6B print. 

The attention of market participants was on ECB speakers on Monday at an event hosted by the European Economics and Financial Centre, in London. ECB President Christine Lagarde was non-committal on Monday, avoiding addressing the central bank’s rate decision next week. 

Lagarde speaking at the recent Jackson Hole Symposium in the US, stressed that the Central Bank’s focus remains on attaining the 2% inflation target. Lagarde’s stance was decidedly hawkish, emphasizing that the ECB’s priority remains to keep inflation constrained. Lagarde stated that interest rates will remain high as long as necessary to bring inflation back down to the ECB’s target. 

The ECB raised interest rates by 25 bp at its July policy meeting, bringing its main refinancing rate to 4.25%. The ECB’s forward guidance was not as decisively hawkish as anticipated, though. The central bank hinted that future rate decisions will be data-based. 

Preliminary GDP data for the second quarter of the year showed that the Eurozone economy expanded by 0.3%, exceeding expectations of 0.2% growth, after contracting by 0.1% in Q1 of 2023.  

Flash CPI data for August showed that Euro Area headline inflation remained unchanged at 5.3% year-on-year against expectations of a drop to 5.1%. Core CPI, which excludes food and energy, however, dropped to 5.3% from 5.5% in July. Inflationary pressures in the Eurozone remain high, increasing the likelihood that the ECB will continue its policy of monetary tightening.

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GBP

GBP/USD edged higher on Monday, reaching the 1.263 level as the dollar weakened. If the GBP/USD rate goes up, it may encounter resistance near 1.274, while support may be found near 1.254. 

The BOE raised interest rates by 25 basis points at its latest policy meeting, bringing the bank rate to a 15-year high of 5.25%. 

High inflation in the UK is putting pressure on BOE policymakers to increase interest rates. Inflation in the UK is showing signs of cooling, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.8% year-on-year in July from 7.9% in June. Core CPI, which excludes food and energy, remained steady at 6.9% though. Even though inflationary pressures in the UK are easing, inflation is still high, and policymakers are likely to continue raising interest rates to bring it down. 

BOE Governor Andrew Bailey has stressed that interest rates will likely stay higher for longer than previously thought to bring down inflation. Speaking at the annual Jackson Hole Economic Policy Symposium in the US, BOE Deputy Governor Ben Broadbent also stressed that monetary policy may have to remain in restrictive territory for some time yet. Market odds are in favor of another 25-bp rate hike in September followed by another in November.

Britain’s economy unexpectedly expanded by 0.5% month-on-month in June after contracting by 0.1% in May, beating estimates of a 0.2% growth. Preliminary GDP estimates for the second quarter of the year were also optimistic, predicting a 0.2% growth from just 0.1% in the first quarter of 2023. The state of the British economy is still precarious though, as prolonged tightening has taken its toll on the labor market and other vital economic sectors. 

TRADE GBP PAIRS

JPY

USD/JPY edged higher on Monday, touching the 146.5 level as the Yen continued to decline against the dollar. If the USD/JPY pair declines, it may find support near 144.4. If the pair climbs, it may find resistance at 147.3. 

The Yen has been weakening, pushed down by the BOJ’s ultra-accommodating monetary policy. The Yen’s weakness has been the subject of concern for Japanese authorities as it undermines the country’s importing potential and causes financial distress in households. Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen. The Yen’s continued weakness is raising market awareness of another intervention by the Japanese currency to support the ailing currency. 

The BOJ recently showed signs of relaxing its ultra-easy policy recently. The central bank maintained its short-term interest rate target steady at -0.10% at its latest policy meeting in July. The BOJ, however, has loosened its yield curve control. This will maintain the rate ceiling but effectively allow rates to float beyond the cap, allowing for rises by a further 50 basis points. 

National Core CPI dropped to 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI dropped slightly to 3.0% in July from 3.1% in June. 

BOJ Governor Kazuo Ueda, speaking at the Jackson Hole symposium in the US defended the BOJ’s ultra-easy policy. Ueda stressed that underlying inflation in Japan remains below the BOJ’s target, indicating that a pivot in the central bank’s policy direction is not on the cards just yet.

Final GDP data for the first quarter of the year showed that the Japanese economy expanded by 0.7%, against a preliminary GDP print of 0.4%. The GDP data exceeded expectations, alleviating recession concerns for Japan. Final GDP Price Index showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.

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Written by:
Myrsini Giannouli

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