US Dollar (USD) Bullish as Odds on for 2016 Fed Rate Hike
Investors were encouraged by the rather hawkish tone struck by Fed Chair Janet Yellen in her appearance before the Joint Economic Committee, with market pricing for a December rate hike remaining over 90%. This boosted the US Dollar (USD) higher across the board, adding to the current sense of optimism over a possible combination of increased fiscal stimulus and renewed monetary tightening. Solid Consumer Price Index and jobless claims data also offered support to the bullish run of the ‘Greenback’.
The more hawkish outlook of the Federal Reserve signalled that policy divergence with the Bank of Japan (BoJ) is likely to increase in coming months. As BoJ policymakers have made it clear that they are willing to intervene to weaken the Yen (JPY) where necessary, the appeal of the safe-haven currency has been limited. Given that Japanese domestic data has remained decidedly unimpressive and the BoJ’s inflation target remains some way off, the US Dollar Japanese Yen (USD JPY) exchange rate was remained on a bullish run.
USD JPY Exchange Rate Forecast: Stronger Japanese Inflation Could Shore up Yen
Thursday’s Japanese Consumer Price Index report is likely to provoke further volatility for the Yen. Forecasts point towards a moderate improvement from -0.5% to -0.1% on the year, which could encourage investors to buy back into the Yen once again. While even this would remain a long way from the 2% inflation target any uptick may boost optimism in the outlook of the domestic economy, at least in the short term.
With the Fed’s return to the monetary tightening cycle already largely priced in the upside potential of the USD JPY exchange rate could be somewhat limited. Even so, with political worries apparently eased, for the time being, the ‘Greenback’ is likely to maintain its bullishness through to the end of the year. As Lee Hardman, currency analyst at MUFG, noted:
‘The election of President Trump has re-energised the US Dollar bull market. It has created more scope for the market to price in expectations for a further widening of monetary policy divergence between the Fed and other major central banks supporting a stronger US Dollar. A significant loosening of US fiscal policy will increase pressure on the Fed to speed up the pace of rate hikes in the coming years.’
However, if there are signs that Trump will not deliver on his promises of increased infrastructure spending and tax cuts then the US Dollar may begin to soften.
Current Interbank Exchange Rates
At the time of writing, the US Dollar Japanese Yen (USD JPY) exchange rate was trending higher at 110.65, while the Japanese Yen US Dollar (JPY USD) pairing was slumped in the region of 0.009.
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