- USD/JPY trades sideways around 147.70 ahead of Fed Powell’s speech at 16:35 GMT.
- The Fed reduced interest rates last week and signaled more cuts this year.
- Economists expect Tokyo CPI to have grown at a faster pace in September.
The USD/JPY pair trades in a tight range around 147.70 during the European trading session on Tuesday. The pair consolidates as investors await the speech from Federal Reserve (Fed) Chair Jerome Powell at 16:35 GMT.
Investors will pay close attention to Fed Powell’s speech to get cues about the current status of the United States (US) labor market and the pace at which the central bank will reduce interest rates.
In the policy meeting last week, the Fed reduced interest rates by 25 basis points (bps) to 4.00%-4.25% amid sowing US job market, even as inflationary pressures remain well above the central bank’s 2% target. The Fed signaled through its dot plot that the Federal Fund Rate could decline to 3.6% by the year-end.
On Monday, a slew of Federal Open Market Committee (FOMC) members stated that the rate cut move was precautionary to boost labor demand, but the Fed should remain cautious about reducing interest rates further.
In the North American session, investors will also focus on the preliminary US S&P Global PMI data for September. The Composite PMI is expected to have remained steady at 54.6.
This week, the major trigger for the Japanese Yen (JPY) will be the Tokyo Consumer Price Index (CPI) data for September, which will be released on Friday. Tokyo CPI ex. Fresh Food is estimated to have risen at a faster pace of 2.8% on year, against 2.5% in August. Signs of price pressures accelerating would prompt expectations of more 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.