- USD/JPY falls slightly to near 147.50 amid caution ahead of FOMC minutes and Jackson Hole Symposium.
- The Fed is expected to cut interest rates in the September meeting.
- Economists expect Japan’s National CPI ex. Fresh Food to have grown moderately by 3% in July.
The USD/JPY pair ticks down to near 147.50 during the European trading session on Wednesday. The pair faces slight selling pressure as the US Dollar (USD) trades cautiously, with investors awaiting Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole (JH) Symposium, which is scheduled for Friday.
Financial market participants will pay close attention to Jerome Powell’s speech to get fresh cues about the likely monetary policy action by the United States (US) central bank for the remainder of the year.
According to the CME FedWatch tool, the odds of the Fed cutting interest rates in the September meeting are almost 85%. Fed dovish bets intensified after the US Nonfarm Payrolls (NFP) report for July signaled weak labor demand in the April-June period, which was anticipated previously.
In Wednesday’s session, investors will focus on Federal Open Market Committee (FOMC) minutes of the July meeting, which will be published at 18:00 GMT. Ahead of FOMC minutes, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to the weekly high around 98.00.
In Japan, investors await the National Consumer Price Index (CPI) data for July, which will be published on Friday. Economists expect the National CPI excluding Fresh Food to have grown at a slower pace of 3%, compared to 3.3% in June. Signs of cooling inflationary pressures would dampen market speculation supporting interest rate hikes by the Bank of Japan (BoJ).
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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