In the early Asian session on Wednesday, the USD/JPY pair traded in negative territory near 145.35 for the fourth consecutive day. The decline was a result of a softer US Dollar and expectations of a dovish message from Federal Reserve (Fed) Chair Jerome Powell at Jackson Hole. Investors are anticipating a Fed rate cut this year, with expectations of three quarter-point cuts in September, November, and December. This sentiment is putting selling pressure on the Greenback as some officials have not ruled out a half-point rate cut in September if there are signs of a further hiring slowdown.
Minneapolis Fed President Neel Kashkari expressed openness to cutting US interest rates in September due to the rising possibility of a weakening labor market. This shift in sentiment has propelled the debate about potentially cutting rates in September. However, Fed Governor Michelle Bowman remains cautious about any policy shifts, citing continued upside risks for inflation. The upcoming US S&P Global PMI for August and Fed Chair Powell’s speech at the Jackson Hole symposium are key events to watch for further market direction. On the Japanese Yen front, the upbeat Q2 Gross Domestic Product growth might prompt the Bank of Japan to hike rates, boosting the Japanese Yen.
Monetary policy in the US is determined by the Federal Reserve (Fed), which aims to achieve price stability and full employment. The Fed uses interest rate adjustments to achieve these goals, raising rates when inflation is above target and lowering rates when inflation is below target or unemployment is too high. This has an impact on the strength of the US Dollar, as higher interest rates make the US a more attractive place for international investors to park their money.
The Federal Reserve holds eight policy meetings a year where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC consists of twelve Fed officials, including members of the Board of Governors and regional Reserve Bank presidents. In extreme situations, the Fed may resort to Quantitative Easing (QE) to increase the flow of credit in the financial system. QE involves the Fed printing more Dollars to buy bonds from financial institutions, weakening the US Dollar.
Quantitative Tightening (QT) is the reverse process of QE, where the Fed stops buying bonds and does not reinvest the principal from maturing bonds. This policy is usually positive for the US Dollar, as it reduces the supply of Dollars in the market. Understanding these policies and their implications can help traders and investors make informed decisions based on the Fed’s actions and statements. Keeping an eye on key economic indicators, such as the US S&P Global PMI and the Japanese National Consumer Price Index, can also provide valuable insights into market trends and potential currency movements.
