The USDOLLAR is having another blockbuster week, attracting initially risk-off flows, but also benefiting from the improvement in sentiment due to hopes for a successful resolution to the US debt ceiling saga, which could facilitate a soft landing. Furthermore, markets moderated their views for multiple cuts by the Fed. The US central bank had hinted to a pause earlier this month, partly due to expectations for a negative impact from tighter credit conditions due the recent banking turmoil.
However, this tightening appears to be limited so far and some officials have alluded to that, such as Ms Logan (voter) who said that the main reason for it is restrictive policy, «not stress in the banking system». More to it, inflation remains elevated and far from the bank’s 2% target, while Unemployment is at five-decades lows. Ms Logan warned that the data so far don’t support a skip in rate hikes yet.
Most officials have refrained from committing either to a hike or a pause, but recent comments have been mostly on the hawkish side and dismissive of rate cuts this year. Even if policymakers stay on the sidelines indeed next month, they more likely to keep further tightening on the table.
Markets seem to be coming to terms with these prospects and now price in chances for another hike, while pushing back the timing of the first hike. At the time of writing, CME’s FedWatch Tool assign the highest probability to a November cut and rates at 4.75% by the end of the year (from 5.25% current).
The Bank of Japan meanwhile maintained its ultra-loose policy setting last month, in the first decision under new Governor Mr Ueda, helped by the fact that Inflation had moderated from its January four-decades peak (4.2% y/y).
In any case, it is still well above the bank’s 2% target and today’s CPI report showed an increase to 3.4% y/y in inflation in April (ex-fresh food) and expectations for policy normalization have been mounting. The BoJ raised its forecast for the current fiscal year to a median of 1.8%.
The greenback’s strength has propelled USD/JPY to new 2023 highs, heading towards one of its best weeks of the year. It eyes 139.39-58 and the 50% Fibonacci of the 2022 high/2023 low drop, although 142.49 has a higher degree of difficulty.
On the other hand, USD/JPY slides today after the hot inflation report form Japan and the advance looks overextended from a technical prospective. This creates scope for a pullback towards the EMA200 at around 135.00. Daily closes below it could pause the bullish bias, but a strong catalyst would be needed for that and the downside appears well-protected.