Yen gains strength after BOJ meeting minutes

Important calendar events

• JPY: SPPI, BOJ Core CPI
• GBP: BOE Quarterly Bulletin
• USD: S&P/CS Composite-20 HPI, HPI, CB Consumer Confidence, Richmond Manufacturing Index

USD

The dollar dipped on Monday and the index dropped from 105.9 to 105.5. US treasury yields also declined, putting pressure on the dollar, with the US 10-year bond yielding 4.24%. 

One of the key factors that are driving the dollar right now is the US rate outlook. The US Federal Reserve kept interest rates unchanged at its policy meeting in June, within a target range of 5.25% to 5.50%, as expected. The US Federal Reserve has held interest rates steady since last July. 

FOMC policymakers feel that more evidence of cooling inflation is required before a policy change can be considered. Fed chair Jerome Powell has stated that the disinflation was slow in the first quarter of the year resulting in a delay in rate cuts.

Odds of a rate cut in September are currently around 70% while a rate cut by November is fully priced in. The uncertainty around Fed rate expectations will likely continue in the coming months causing volatility in Forex markets.  

The Fed’s latest dot plot, which is the summary of the central bank’s economic projections, was updated in June to take into account recent inflation and economic data and to provide estimates of the Fed’s interest rate outlook. According to the central bank’s revised dot plot, Fed officials expect to cut interest rates only once in 2024. 

US CPI data for May showed that disinflation in the US is finally progressing. Monthly inflation remained the same in May, after rising by 0.3% in April and against expectations of a 0.1% rise. Headline inflation eased to 3.3% year-on-year in May from 3.4% in April, dropping below expectations of a 3.4% print. Core inflation, which excludes food and energy, rose by just 0.2% in May versus 0.3% anticipated. Annual Core CPI came in at 3.4% versus 3.6% expected, its lowest reading in three years.

The US economy expanded by just 1.3% in the first quarter of the year falling considerably below the 3.4% expansion registered in Q4 of 2023. The US economy is expanding at an increasingly slower pace putting pressure on the dollar, as GDP data have shown expansion by 4.9% in the third quarter of 2023. In addition, the Preliminary GDP Price Index rose by just 3.0% in Q1, which represents a downward revision of 0.1% from the previous estimate.

Several important US fundamentals are due this week and may cause volatility in the price of the dollar. Final GDP data for the first quarter of the year on Thursday will provide information on the state of the US economy. Core PCE Price index data on Friday are especially important as this is the Fed’s preferred inflation gauge. Analysts are predicting that Friday’s data will show a drop in the Core PCE Price index for May, which may spur the Fed to start lowering interest rates. 

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EUR

EUR/USD surged on Monday, climbing to the 1.074 level as the dollar weakened. If the EUR/USD pair declines, it may find support at 1.067, while resistance may be encountered near 1.076.

German business morale unexpectedly fell in June according to data released on Monday. The German IFO Business Climate index dropped to 88.6 in June from 89.3 in May, disappointing expectations of an 89.4 print. 

The ECB lowered its Main Refinancing Rate by 25 basis points to 4.25% in June. Eurozone inflation remains sticky and may slow down the pace of future rate cuts. ECB President Christine Lagarde has stated that the central bank’s policy will remain data-driven. 

The Euro has been under pressure since political turmoil in France led to the announcement of national elections. French President Emmanuel Macron has decided to dissolve the parliament and announce a snap election on the 30th of June, putting pressure on the Euro. 

On the data front, headline inflation in the Euro Area accelerated to 2.6% year-on-year in May up from 2.4% in April and exceeding the forecast of 2.5%. Core CPI, which excludes food and energy, rose to 2.9% on an annual basis in May from 2.7% in April against expectations of a 2.7% print. Inflationary pressures in the Eurozone are not easing as fast as anticipated, which might hold up the ECB’s plans to lower interest rates.

The Eurozone economy expanded by 0.3% in the first quarter of the year, which was in line with preliminary estimates. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1. 

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GBP

GBP/USD edged higher on Monday, rising to the 1.268 level. If the GBP/USD rate goes up, it may encounter resistance near 1.274, while support may be found near 1.260. 

In the coming weeks, we expect to see high volatility in the price of the Sterling especially ahead of the UK elections on July 4th. 

The BOE kept interest rates steady at its latest monetary policy meeting last week. The BOE maintained its official rate at a 16-year high of 5.25. The BOE's Monetary Policy Committee voted 7-2 to keep rates on hold with two members voting to cut interest rates by 25 basis points.

Markets are pricing in a rate cut in September with approximately 70% probability, while a rate cut by November is fully priced in. Rate cut expectations have shifted from two rate cuts and a total of 50 basis points of rate cuts in 2024 to approximately 35 bp reduction in rates within the year. 

Price pressures in the UK are easing, raising the odds of a BOE rate cut by September. British headline inflation eased to 2.0% on an annual basis in May from 2.3% in April, which was in line with expectations. Annual Core CPI, which excludes food and energy, fell to 3.5% in May from 3.9% in April. 

The BOE had updated its inflation outlook earlier this year, predicting that inflation would drop to the BOE’s 2% target in the second quarter of the year. The BOE’s forecasts were realized in May relieving the pressure on the BOE to maintain a restrictive monetary policy. British inflation dropped to the BOE’s target for the first time in nearly three years indicating that the BOE’s hawkish monetary policy has been paying off. 

The British economy remains fragile and may force the BOE to pivot to a more dovish policy. The British economy remained stagnant in April after expanding by 0.4% in March. The UK slipped into recession last year as the economy contracted by 0.3% in the final quarter of 2023. 

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JPY

USD/JPY almost touched the 160 level in early trading on Monday with the currency rate reaching its highest level since April. The Yen gained strength after the release of the BOJ meeting minutes later on Monday, and USD/JPY dropped to 159.6. If the USD/JPY pair declines, it may find support near 156.8. If the pair climbs, it may find resistance near its all-time high of 160.4.

The Yen has been under pressure since the BOJ disappointed expectations of a hawkish shift at its latest meeting. The BOJ kept all policy settings unchanged at its meeting in June. The minutes of the meeting were released on Monday and showed a rather hawkish bias, boosting the Yen. Two BOJ members appeared to be in favor of a rate hike soon, hinting at raising interest rates in July. Other BOJ members, however, appeared to be more cautious, wanting to wait for more evidence of rising inflation before raising interest rates.

The BOJ has pivoted to a more hawkish policy at its meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks. 

BOJ Governor Kazuo Ueda has hinted that the central bank would ease its bond purchasing at the next meeting in July. BOJ officials, however, have not given any specifics for paring back their bond-buying program. Market expectations of a hawkish shift were disappointed after the BOJ policy meeting, putting pressure on the Yen. 

BOJ officials have been attempting to boost the Yen, with BOE Governor Kazuo Ueda repeatedly warning traders against speculative short selling of the currency. Masato Kanda, Japan's top currency diplomat, stated on Monday that authorities will take appropriate steps if there is excessive foreign exchange movement and that the addition of Japan to the US Treasury's monitoring list would not restrict their actions. Threats of an intervention to support the Yen, however, have been issued for the past few months and no longer have a significant impact on markets. 

On the data front, inflation in Japan remains weak but rising. Headline inflation rose to 2.5% year-on-year in May from 2.2% in April. BOJ Core CPI dropped to 1.8% on an annual basis in April, falling short of expectations of 2.2%. Low inflation in Japan is preventing the BOJ from raising interest rates putting pressure on the Yen.

Preliminary GDP data for Q1 of 2024 for Japan showed that the country has slipped into recession. Japan’s economy shrank by 0.5% in the first quarter of the year against expectations of a 0.3% drop. Japan’s economy registered a small expansion by 0.1% in the final quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.

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Written by:
Myrsini Giannouli

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