JPY weakening as BoJ announces changes in policy

JPY weakened as the BoJ pledged to keep interest rates very low, currently remaining on hold at -0.10%. The bank also intends to maintain a long term yield target around zero and to make its policy framework more flexible, reflecting the forecast that it would take time for inflation to reach its 2% target. However, the bank also added that long term interest rates may fluctuate depending on economic and price developments. USD/JPY rose on the news, reflecting the weakening of the JPY which could continue to set the mood for the near term.

USD/JPY rose and tested the 111.30 resistance line during today’s Asian session, however corrected somewhat quite quickly. We could see the pair having some bullish tendencies today as the financial releases could favor the USD side. It should be noted though that to remove our sideways bias, we would require a clear breaking of the 111.30 resistance line. Should the bulls take over the market we could see the pair breaking the 111.30 resistance line and aim for the 112.05 resistance level. Should the bears take over the market we could see the pair aiming if not breaking the 110.75 support line.

BoJ interest rate decision

BoJ will announce its interest rate decision during tomorrow’s Asian morning and is widely expected to remain on hold at -0.10%. Currently JPY OIS imply a probability for the bank to remain on hold of 98.37%. A lot of ink has been spilled on whether there is going to be a more hawkish tweak regarding the bank’s QQE program in the accompanying statement, however recent financial releases seem to disagree with such a scenario. Also, analysts mention the possibility for the bank to lower its expectations regarding inflation as it currently seems to be drifting further away from the bank’s target. Should there be a neutral to dovish comment, we could see the JPY weakening.

USD/JPY continued its sideways movement on Friday and today’s Asian morning between the 110.75 support line and the 111.30 resistance line. The pair could continue to have a sideways movement however some bearish tendencies could follow, should headlines about a hawkish tweak in BoJ’s accompanying statement affect the market. Should the pair come under selling interest we could see the pair breaking the 110.75 support line while should it find extensive buying orders along its path we could see it breaking the 111.30 resistance line.

PFXS news for week ahead (July 30th – August 3rd)

On Monday, in the European session, Germany’s preliminary HICP rate for July will be released. The rate is forecasted to remain unchanged at +2.1% yoy if compared to previous month’s preliminary and final reading. Should the actual rate meet the forecast we could see the common currency getting some support as the rate remaining at the same high levels could be good news for the ECB. The rate could support comments made by president Draghi in his press conference after the last interest rate decision announcement and
have a positive influence to the overall inflation rate of the Euro-zone.

 

On Tuesday, during the Asian session we get BoJ’s interest rate decision. The bank is widely expected to remain on hold at -0.10%, as currently JPY OIS imply a probability for such a scenario of 98.61%, making it more or less an open and shut case. Hence the market’s attention is expected to turn to the accompanying statement. Despite the inflation rate being unchanged at +0.7% yoy, we would not expect a further downgrading of the bank’s expectations after it’s last policy meeting. However some further development regarding JGB’s could be possible. There is lots of ink being spilled on whether the bank will tweak it’s policy in the upcoming session while at the same time other analysts see the case for the bank to do absolutely nothing as any policy tweak could be misinterpreted as a step towards policy normalization. Also we would like to mention that recent lukewarm financial releases could blur the picture even further. Should there be a neutral to dovish accompanying statement we could see the JPY weakening as expectations for a possible tweak in t’s monetary policy may not be realized, however we would also like to point out that the last policy meeting which produced similar results had little effect on JPY.

 

In the European session we get France’s and Euro-zone’s preliminary inflation rates for July. The rates are forecasted to accelerate for France to +2.4% yoy if compared to previous reading of +2.3% yoy while to remain unchanged for the Euro-zone at +2.0% yoy. Should the actual rates meet the forecasts we could see the common currency getting some support as the rates are already at the ECB’s target which could be considered as satisfactory by some analysts and well in line with recent comments for a gradual acceleration.

 

On Wednesday, in the American session we get the US ISM Mfg PMI for July. The PMI is forecasted to drop to 59.8 if compared to previous reading of 60.2.
Should the forecast be realized we could see the greenback weakening as the drop could be perceived by the market as a bearish signal. It should be noted though that the indicator’s readings remain at rather high levels and the market may tolerate the drop. Late in the US session, the FOMC interest rate decision will be released. The bank is widely expected to remain on hold at +2.00% and Fed’s Funds Futures imply currently a possibility for the bank to remain on hold at 97.4%. Hence, market focus may turn to the accompanying statement. With the inflation being at rather high levels, the GDP growth rate latest release being also high and the unemployment rate being at rather low levels, the bank may be enabled to produce a neutral to hawkish statement paving the way for the next rate hike. We could see some elements implicitly supporting the 2018 four rate hike path argumentation and in such a case the greenback could get some support.

 

On Thursday, in the European session, BoE will announce its interest rate decision. The bank is expected to hike rates by 25 basis points reaching +0.75%, if compared to current rate of 0.50%. Currently, GBP OIS support such a scenario as they imply a probability for the bank to hike rates of 79.9%. With the inflation rate currently being at 2.4% which is higher than the bank’s target and unemployment being at rather low levels, the bank could hike rates indeed. However the low GDP growth rate and a potential messy Brexit coming up, could advise cautiousness on behalf of the bank. It may be the case though that the two could be combined in a dovish hike were the bank would hike rates but issue a dovish accompanying statement. The possibility of the bank remaining on hold, could cause the pound to free fall as current expectations of a rate hike are still high despite the recent negative Brexit developments.

 

On Friday, in the European session we get UK’s Services PMI for July. The PMI is forecasted to drop and reach as low as 54.6 if compared to previous reading of 55.1. Should the actual reading meet the forecast we could see the pound weakening as the drop is substantial and would mark a turning point to the indicators previous ascending results. However it should be noted that such a reading would still constitute a rather high reading for the particular indicator in recent results.

In the American session we get the US employment report for July. The report contains the Non-Farm Payrolls figure which is forecasted to drop as low as 195 k, if compared to previous reading of 213 k, the Average earnings growth rate which is forecasted to remain unchanged at +2.7% yoy and the unemployment rate which is forecasted to drop to 3.9% if compared to previous reading of 4.0%.

 

Should the actual readings meet the forecast we could see a rather strong employment report for the US. Despite the drop of the NFP figure we see the case for the high average earnings growth rate and the drop of the unemployment rate to provide a picture of a rather tight labor market, which could provide some support for the USD.