The USD's outlook hinges on the upcoming FOMC decision, with potential volatility depending on the size of the rate cut. A 50bps cut could raise concerns about growth and pressure the USD, while a 25bps cut may offer stability. For the JPY, markets expect no immediate rate changes from the BoJ, but Governor Ueda's commentary and future rate hike hints will shape its outlook.

USD: 25bp or 50bp cuts?

The USD is expected to face pressures in the near-term driven by uncertainty surrounding the Federal Reserve's policy decisions and mixed economic signals. Recent domestic developments highlighted the Fed's dilemma: whether to implement a smaller 25bps cut or a more substantial 50bps reduction at the upcoming September meeting. Analysts from Bank of America and JP Morgan are leaning towards the latter, with JP Morgan maintaining its forecast for a 50bps cut despite recent CPI data suggesting a softer inflation environment. Goldman Sachs and UniCredit also expect a 25bps cut, citing stabilizing inflation and labor market conditions, though they acknowledge the potential for a larger cut due to market volatility and recent statements from former Fed officials.

In terms of economic data, August's CPI came in at 2.5% Y/Y, slightly below expectations, while core CPI and PPI reports indicated mixed signals on inflation. The CPI report showed some easing in inflation pressures, with core CPI rising by 0.28% M/M and the PPI increasing more than expected. These mixed signals contribute to the uncertainty about the Fed's next move. As the Fed prepares to update its economic projections, market expectations for a 50bps cut have surged to 41%, though many analysts still lean towards a 25bps reduction, considering it a more measured approach given the current economic conditions.

Looking ahead, the focus will be on the FOMC announcement. If the Fed opts for a 50bps cut, it could signal concerns about economic growth, potentially exerting more bearish pressure on the USD. Conversely, a 25bps cut might align with market expectations, providing some stability to the USD. Overall, the USD’s performance this week will be closely tied to the Fed’s decisions and the release of economic data, with potential for increased volatility based on the Fed’s stance and any unexpected developments.

JPY: On hold but remain hawkish

Recent developments suggest a predominantly bullish outlook for the JPY, driven by various supportive factors. The JPY’s strength has been bolstered by its role as a safe haven amid global uncertainties, coupled with widening rate differentials. Analysts and markets are increasingly confident in the JPY's potential for further gains, particularly given the BoJ forward guidance on future rate hikes in July meeting. The BoJ's intention to raise rates gradually into 2025 and its ongoing focus on inflation risks reinforce the bullish sentiment.

Further supporting the JPY is the expected reduction in the Fed’s rates, which could narrow the US-Japan interest rate spread and enhance the Yen's appeal. Comments from BoJ officials indicating readiness to adjust policy in response to economic conditions add to the positive outlook, signaling that the Yen may continue to outperform the USD in the near term. Additionally, recent observations on oil prices have also been favorable for the JPY. The impact of fluctuating oil prices has created a positive terms of trade shock for Japan, while the Yen has appreciated against the Euro due to favorable Japanese equity performance relative to Eurozone equities.

Looking ahead, market participants will focus on key upcoming events that could influence the JPY's trajectory. Japanese Core Nationwide CPI is expected to rise slightly to 2.8%, providing insights into inflation dynamics just before the BoJ’s next policy meeting. Although markets largely anticipate no immediate rate changes, the BoJ's stance on monetary policy and Governor Ueda’s commentary will be closely watched. The central bank is expected to maintain its current rate of 0.25% but remains open to future hikes if economic conditions and inflation align with its forecasts. This environment of cautious optimism and ongoing BoJ commentary will be pivotal in shaping the JPY’s near-term outlook.

USD/JPY 4H Chart

Disclaimer

This material is provided for informational purposes only and does not constitute financial, investment, or other advice. The opinions expressed in this material are those of the author and do not necessarily reflect the views of Trive International. No opinion contained in this material constitutes a recommendation by Trive International or its author regarding any particular investment, transaction, or investment strategy. This material should not be relied upon in making any investment decision.

The information provided does not consider the individual investment objectives, financial situation, or needs of any specific investor. Investors should seek independent financial advice tailored to their individual circumstances before making any investment decisions. Trive International shall not be liable for any loss, damage, or injury arising directly or indirectly from the use of this information or from any action or decision taken as a result of using this material.

Trive International may or may not have a financial interest in the companies or securities mentioned. The value of investments may fluctuate, and investors may not get back the amount they originally invested. Past performance is not indicative of future results.

For more information about Trive International, please visit http://trive.com/int

Additional Information

Investing involves risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or guarantee against loss. The content in this material is subject to change without notice and may become outdated or inaccurate over time. Trive International does not undertake any obligation to update the information in this material.

By accessing this material, you acknowledge and agree to the terms of this disclaimer. If you do not agree with these terms, please refrain from using this information.