USD/JPY extends slide below 145.50 on Fed rate cut hopes and weaker US dollar

VaselineAugust 21, 2024

0 3 minutes read

USD/JPY extends slide below 145.50 on Fed rate cut hopes and weaker US dollar

USD/JPY weakens to 145.35 in the Asian session on Wednesday.
Higher expectations of a Fed rate cut in September undermine the USD.
US S&P Global Advanced PMI for August is due on Thursday ahead of Fed Chair Powell’s speech.

USD/JPY is trading in negative territory near 145.35 for four consecutive days during the opening Asian session on Wednesday. The softer US dollar (USD) and the expectation of a dovish message from Federal Reserve (Fed) Chairman Jerome Powell in Jackson Hole is pulling the pair lower.

Investors are confident the US Fed will cut interest rates this year, expecting to cut the Fed by three-quarters of a point in September, November and December. This in turn puts some selling pressure on the greenback. Some officials said a half-point Fed rate cut in September could not be ruled out if there were signs of a further slowdown in hiring.

Minneapolis Fed President Neel Kashkari said on Monday that he would be open to cutting US interest rates in September because of the growing possibility that the labor market will weaken too much. “The balance of risks has shifted, so the debate about a potential rate cut in September is an appropriate one,” Kashkari said.

Meanwhile, Fed Governor Michelle Bowman said on Tuesday she remained cautious about any policy change because of what she sees as continued upside risks to inflation. She warned that overreacting to any single data point could jeopardize the progress already made.

The preliminary US S&P global PMI for August is due later Thursday. If the report shows a better-than-expected result, it could limit the USD’s downside. On Friday, Fed Chairman Powell’s speech at the Jackson Hole Symposium will be in the spotlight.

On the JPY front, upbeat Q2 Japanese Gross Domestic Product (GDP) growth could prompt the Bank of Japan (BoJ) to hike more rates this year, which broadly boosts the Japanese Yen (JPY). Japan’s economy grew 0.8 percent in the second quarter versus the 0.5 percent forecast. Traders will take more cues from Japan’s National Consumer Price Index (CPI) for July, due on Friday.

(This story was corrected on August 21 at 01:30 GMT to say in the article that the US S&P Global Advanced PMI for August will be due on Thursday, not Wednesday.)

Fed FAQ

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability and to promote full employment. Its main tool for achieving these objectives is the adjustment of interest rates. When prices rise too quickly and inflation is above the Fed’s 2 percent target, it raises interest rates, raising borrowing costs throughout the economy. This results in a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates to encourage lending, which hurts the greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials attend the FOMC—the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve rotating one-year terms. .

In extreme situations, the Federal Reserve can resort to a policy called 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy higher quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds at maturity to buy new bonds. It is usually positive for the value of the US dollar.

VaselineAugust 21, 2024

0 3 minutes read

Fed FAQ

Vaseline

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