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USD to JPY Exchange Rate Tumbles as Markets Bet on July Interest Rate Cut from Federal Reserve

June 20, 2019 - Written by David Woodsmith

Despite the Bank of Japan (BoJ) also warning of mounting global risks, the US Dollar to Japanese Yen (USD/JPY) exchange rate has tumbled to its worst levels since January this week due largely to Central Bank speculation. Rising bets that the Federal Reserve will cut US interest rates next month are keeping the pair under pressure, despite speculation that the Bank of Japan could also loosen Japan’s monetary policy over the next year.

After seeing mixed and relatively muted movement for most of June so far, USD/JPY has seen its sharpest move all month this week due to the Federal Reserve news. USD/JPY opened this week at the level of 108.55, and after briefly holding its ground, the pair slumped yesterday. At the time of writing, USD/JPY was trending just above the morning’s 5-month-low of 107.52.

The primary cause of USD/JPY movement was of course last night’s Federal Reserve policy decision, and this morning’s BoJ news was perceived as fairly low-influence in comparison.

USD Exchange Rates Plunge as Investors Price in Fed’s July Interest Rate Cut

It was only earlier this year when investors were speculating that the Fed may take US interest rates even higher, and not long after that that the Fed indicated it would happily leave rates frozen for quite some time.

However, that has quickly changed over the past month, as signs of slowing US economic growth and worsening trade protectionism led to a surge in US interest rate cut bets.

Then, this week, the Federal Reserve firmly signalled that rate cuts were likely on the way.

While the bank left US monetary policy frozen during its June policy decision yesterday as expected, the bank’s signal led to bets that the first interest rate cut would likely arrive as soon as July’s policy decision.

According to Fed Chairman Jerome Powell:

‘We’d like to see if these risks continue to weigh on the outlook.

We want to see and we want to react to trends that are sustained, that are genuine.’

On top of the bank’s signals, investors were also spooked by news that St. Louis Fed President James Bullard had dissented from the bank’s official line. Bullard argued that US interest rates needed to be cut sooner rather than later.

Due to these factors, investors priced in an interest rate cut for July, with some betting that the rate could be cut by as much as 50 basis points.

JPY Exchange Rates up Versus USD despite Bank of Japan’s (BoJ) Own Caution

The US Dollar slumped against most major rivals in response to the Federal Reserve news, even against the Japanese Yen which was also weighed by Central Bank news today.

The Bank of Japan (BoJ) held its own June monetary policy decision during today’s Asian session. Like the Federal Reserve, the BoJ left monetary policy frozen.

While it indicated that it may also need to loosen monetary policy, it stopped short of signalling that any dovish movement would be made soon. According to Izuru Kato, Chief Economist at Totan Research:

‘There's a good chance the Fed will cut rates in July. If that happens, the BOJ will strengthen its forward guidance to keep Yen rises in check,

The BOJ's next move will depend on how the US economy performs and how Washington's trade war with China progresses.’

Expectation for a more dovish BoJ has kept pressure on Yen as well, and the currency is weakening against major currencies besides the US Dollar, like the Pound and Euro.

USD/JPY Exchange Rate Forecast: Investors Await Japanese Inflation Results

With this week’s major Central Bank news having passed, investors are now anticipating upcoming data that could further influence monetary policy bets.

Some of the US data still on the way this week, including today’s Philadelphia Fed manufacturing stats and tomorrow’s US PMI projections from Markit, could influence Federal Reserve speculation if they surprise investors.

However, the biggest focus will be on tomorrow’s Japanese Consumer Price Index (CPI) inflation rate report.

Japanese inflation has been slowing, and if the rate slows further, the Bank of Japan (BoJ) may have more reason to further loosen Japan’s monetary policy over the next year.

Poor Japanese inflation data could make it easier for the US Dollar to Japanese Yen exchange rate to recover some of its losses before markets close for the week.
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