The USD/JPY currency pair has dropped to a fresh weekly low so far during the Asian session. That would be its fourth consecutive day of decline. Diverging monetary policy expectations are the key driver of this decline. Given such divergence in outlooks between BoJ and Fed, we’re starting to see indications of inflation cooling and softer consumer-spending figures in the US.
The recent economic climate suggests that the Fed should be willing to cut interest rates. This thinking comes on the heels of some pretty soft inflation numbers reported earlier this week. Recent dovish signals paired with softening economic indicators have fueled a surging wave of speculation about imminent Fed rate cuts. We believe that this monetary paradigm shift is pushing the USD/JPY downtrend. Speculators are piling in and trading is very much centered on positioning. This new development reflects increasing worries about the state and strength of the U.S. economy relative to Japan’s.
Three important factors are growing this trend. The recent ups and downs of U.S. consumer spending figures have sent shock waves about the state of economic affairs. The Fed’s highly anticipated first cut is already making waves in the market. At the same time, Japan’s lackluster first-quarter GDP report has added severe pressure on the USD/JPY pair. In light of Japan’s continuing economic turmoil, the persistent divergence in monetary policy expectations is still keeping this trend firmly downward.
At the same time, the Australian dollar (AUD) has been bouncing off and on around the 0.6400 area with conflicting messages. According to market sentiments, the prospect of RBA rate cuts next week is capping gains for the Aussie. Traders are trying to front-run these shifts in monetary policy. That can be attributed to ongoing optimism about a potential U.S.-China trade deal, lending support to the AUD. This underscores the reality that currency movements are often driven by geopolitical events.
Gold prices are struggling with the recent bounce from a month-low. At the same time, dramatic currency shifts are exacerbating the pain. Gold price has had a hard time keeping the gains, consolidating around $3,250 during the Asian session. A U.S.-China trade deal has been driving market sentiment largely on hopes and optimism. Consequently, this stagnation of supply and resulting lack of investment has led to a dramatic drop in U.S. bond yields. In turn, falling yields have done even more to sap demand for the U.S. dollar.
Equities are rallying as softer inflation figures from the U.S. have put USD bulls on the back-foot. This change has created even greater confusion in the marketplace. As traders navigate through these mixed signals, they remain cautious about future movements in both currency pairs and commodities like gold.