As of this writing during American trading hours, the USD/JPY currency pair is at about 147.80. Earlier in the session it even briefly fell to an intraday low water mark of 147.51. The US Dollar remains strong against the Japanese Yen. This newfound stability is being buoyed by hawkish, or at least very cautious, comments from Federal Reserve officials. As traders anticipate Fed Chair Jerome Powell’s scheduled remarks at 16:35 GMT, various economic indicators are influencing market sentiment.
The US Dollar Index (DXY) is recently trading around the 97.38 level. This level is a testament to the Greenback’s resilience in the face of decidedly unfriendly recent economic data. After a solid August, in September both manufacturing and services activity softened a bit. These last indicators reflect very strong growth still continuing, supporting the dollar’s strength. The market’s attention now shifts to Powell’s next speech, which is sure to be closely analyzed for signals as to what monetary policy will do next.
Economic Indicators Impacting Currency Markets
And just the other day, S&P Global’s new economic data showed that the Composite Purchasing Managers Index (PMI) is falling. It fell to 53.6 in September, from 54.6 in August. This figure was not only below predictions of 54.6 but serves to underscore a moderating trend in US economic performance. The Manufacturing PMI plummeted to 52, indicating an end to the recent expansion in manufacturing. By contrast, the Services PMI came in at 53.9, indicating modest expansion in the services sector.
The economy continues to expand according to the broader PMI data. It’s failing to do so at a slower pace. The market’s response to these numbers has been muted but certainly not doomsday. For the first time in years, the Fed is taking economic stability seriously. Consequently, the dollar has found some momentum as investors digest what all these reports mean.
This more cautious enumeration of risks, as noted by Fed officials, has served to bolster the Greenback. Traders are now deeply assessing how this new data will interact with Powell’s speech on the horizon. Investors are apparently hoping to see him signal any major hints about future monetary policy changes in his speech.
Bank of Japan’s Policy Stance
As a reminder, last week the Bank of Japan (BoJ) decided to maintain the status quo. This decision was taken despite the rising expectations for an October interest rate increase, distinguishing the BCT’s move from that of the US Federal Reserve. The ruling has put at least some downward pressure on the Japanese Yen versus the US Dollar. To that end, it’s contributed to stabilizing the USD/JPY cross.
Despite this, analysts note, the BoJ has doubled-down on its indefatigable stance. Investors are slowly starting to price in the odds of a policy pivot. Market participants are highly expecting any signs that the BoJ could change course from its decades long accommodative policy. Even a small adjustment can have a big impact on the USD/JPY relationship. More importantly, it will change the interest rate differential between the two currencies.
The BoJ now faces a far more entangled economic picture. It needs to continue to encourage growth but at the same time be vigilant against any emerging inflationary pressures. How this unfolds in the weeks ahead will be key not only for the direction of Japanese equities but for the Yen’s direction against the USD.
Market Sentiment and Future Outlook
Even as traders brace for Powell’s comments on Friday, market sentiment continues to reflect optimism about the US economy’s ability to stand firm against the odds. The USD/JPY is finding a floor near 147.80. Investors are keenly focused on the domestic economic picture and the international picture as the backdrop to their trading decisions continues to evolve.
The long-awaited address by Powell should provide insight into how the Fed views inflation and the direction of our economic growth. Should he signal continued support for monetary tightening in response to ongoing inflation concerns, it could strengthen the Greenback further. On the flip side, another sign of anything more dovish could trigger a retrenchment in USD valuations.