Today there will be an important event to future recession watchers in light of the continued sharp tightening of the Fed’s policy. The US economic growth rate will be announced amid expectations of a slowdown. The USD/JPY currency pair is stable around the bullish rebound gains of 137.70, which increases expectations towards the psychological top of 140.00. The dollar/yen pair is stable around the 137.10 level at the time of writing the analysis.

Hawkish or Dovish?

Markets and investors will remain focused on Friday, when Federal Reserve Chairman Jerome Powell addresses an annual economic conference in Jackson Hole, Wyoming. This has been the place for market action rhetoric in the past, leading investors to hope that Powell will provide more clarity on a rate hike. Will it be hawkish, which is what investors call the bias towards aggressive rate increases? Or dovish, which is Wall Street’s talk of easier circumstances?

Analysts pointed to several variables that could change the Fed’s thinking ahead of its next rate policy meeting in September. They don’t think he wants to appear tough or pessimistic, maybe he wants to appear as a pigeon. They cautioned that the speech could be “nothing” with little to chew on, although the market may consider that positive given some expectations that Powell will appear hawkish.

Generally high interest rates slow down the economy in the hope of reducing inflation. But they also risk strangling the economy if they are aggressively made and drive down the prices of all kinds of investments.

Stock traders sitting still for now

Stock traders remained reluctant to make any huge bets ahead of Jerome Powell’s speech on Friday, which may provide clues to how optimistic the Federal Reserve is in the face of mounting economic challenges. These concerns did not actually go anywhere despite the controversial pivotal pacifist narrative which some have cited as one of the reasons for the short covering rebound from June lows.

Indeed, before the prestigious Jackson Hole event that Powell and global policy makers will attend, traders have had to absorb more hawkish talk. Minneapolis Fed President Neil Kashkari said late Tuesday that it was “very clear” that officials need to tighten up and get inflation under control again.

Economic reports were mixed at best, underscoring the delicate task that policy makers face in bringing down high inflation without triggering a recession. Wednesday’s data showed US pending home sales fell to the lowest level since the pandemic began. While orders from US factories for core capital goods have exceeded expectations, the picture may change in the coming months amid rising borrowing costs and uncertainty over the growth outlook.

Forecast of the dollar against the Japanese yen

• There is no change in my technical view of the performance of the USD/JPY currency pair, as the general trend is still bullish.
• I expect stability around its gains until the reaction from Jerome Powell’s statements during the Jackson Hole symposium to determine the future of raising US interest, the strength factor of the US dollar in the markets recently.
• The bulls’ destinations closest to the current performance are the resistance levels 137.85, 139.20 and 140.00, respectively.

On the downside, the support level 133.30 will be important to change the trend outlook. The currency pair will be affected today by the risk appetite of investors, as well as the reaction from the announcement of the US GDP growth rate and the number of weekly jobless claims.

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After the Federal Reserve announced the US interest rate hike, as expected, the price of the US dollar against the Japanese yen gained an upward momentum. This led to it towards the level of 137.45, but the currency pair did not enjoy gains for long, as it returned to retreat to the support level 136.40 following comments from the governor. Federal Reserve officials raised US interest rates by 75 basis points for the second month in a row, providing severe tightening in more than a generation to curb rising inflation – but they risk delivering a heavy blow to the economy.

US monetary policy makers, facing the hottest price pressures in 40 years, raised the target range for the federal funds rate on Wednesday to 2.25 percent to 2.5 percent. This brings the cumulative increase from June to July to 150 basis points – the largest rise since Paul Volcker’s anti-price era in the early 1980s.

In its statement, the FOMC said it was “strongly committed to returning inflation to its 2 percent target,” it said in a statement issued in Washington, repeating previous language that it was “extremely concerned with inflation risks.” The FOMC reiterated that it “expects that continued increases in the target range will be appropriate”, and that it will adjust policy if risks arise that may impede achieving its objectives.

US stocks remained high after the decision. Short-term Treasury yields rose, and the dollar fell.

FOMC Meeting Updates

The FOMC vote, which included two new members, Vice President for Supervision Michael Barr and Boston Fed President Susan Collins, was unanimous. Adding Barr to the board of directors earlier this month gave him a full line-up of seven governors for the first time since 2013.

Officials have been criticized for underestimating inflation and slow to respond, and they are now aggressively raising interest rates to cool the economy, even if it threatens to push it into recession. And higher prices are already having an impact on the US economy. The effects are particularly evident in the housing market, where sales have slowed.

While Federal Reserve officials assert that they can manage a so-called “soft landing” of the economy and avoid a sharp deflation, a number of analysts say the recession with rising unemployment to significantly slow price gains. The Federal Open Market Committee noted that “recent indicators of spending and production have declined,” but it also noted that job gains “have been strong in recent months, and the unemployment rate has remained low.”

The recent increase puts US interest rates close to the Fed policy makers’ estimates of neutrality – a level that neither speeds up nor slows down the economy. Forecasts in mid-June showed officials expected to raise rates to about 3.4 percent this year and 3.8 percent in 2023. Investors are now watching to see if the Fed will slow the pace of rate increases at its next meeting in September, or If strong price gains pressure the central bank to continue the large-volume hikes.

Central banks around the world are fighting a battle against rising prices. Earlier this month, the Bank of Canada raised interest rates by a full percentage point and surprised the European Central Bank with a half-point larger-than-expected move, its first increase in more than a decade.

USD/JPY Daily Forecast:

Despite the recent stability, the USD/JPY currency pair is still maintaining the bullish trend. The first reversal of the general trend will not occur according to the performance on the daily chart without the currency pair moving below the 134.40 support level. I still prefer buying USD/JPY from every bearish level. On the other hand, and over the same time period, breaking the resistance 137.85 will be important for the bulls to launch towards the awaited psychological top 140.00 at the earliest time. Today’s US dollar pairs will be affected by the announcement of the US economic growth rate.

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For the second day in a row, the price of the USD/JPY currency pair is moving within profit-taking operations. This noted a lot about the possibility of it happening at any time after the pair’s gains towards the resistance level 125.10 at the beginning of this week’s trading, the highest for the currency pair in seven years. The recent selling operations pushed the pair towards the 121.30 level this morning. The Japanese yen has recently fallen sharply amid the widening gap between the monetary policies of the Bank of Japan (BoJ) and the Federal Reserve (Fed), but the USD/JPY may rise further, according to Mizuho’s foreign exchange sales office, with potential implications for the GBP/JPY.

In this regard, the head of foreign exchange sales for financial institutions at Mizuho said on Tuesday that the Japanese yen is likely to fall further, and that the USD/JPY may reach the level of 130 in the coming months, a possible outcome that would raise the pound/ Japanese yen to 170 or more.

“I doubt the current uptrend is over,” said Neil Jones, Mizuho’s Head of FX Sales for Financial Institutions, in a note to clients. Looking for more yen sales in April and May. My personal sense is an orderly trend above the dollar at moderate speed with steady ranges.” He added, “The roadmap should prove 125 to 130 more liquidity than the recent price movement and limit official attention to only verbal references.”

The yen stabilized against the dollar and the British pound on Tuesday in what may be profit taking by speculative traders after overnight comments from Japanese Finance Minister Shunichi Suzuki, who said the government is watching the yen closely. This was after the yen fell to multi-year lows in the opening session of the week when the Bank of Japan said it would intervene in the Japanese government bond market with unlimited purchases in order to limit increases in government borrowing costs.

Lee Hardman, FX analyst at Japan’s MUFG, said: “While comments from Japanese officials overnight are unlikely to reverse the yen’s weakening trend on their own, they should at least help slow the recent rapid pace of yen selling that it has been evident over the past two weeks.”

Part of the Bank of Japan’s monetary policy is to keep the 10-year government borrowing cost close to 0.10% and prevent it from rising above 0.25%, although enforcement of this policy has become more difficult in recent weeks due in part to Federal Reserve monetary policy. .

The Fed raised the US federal funds rate for the first time since 2018 this month. Markets are increasingly expecting that it will likely reverse further over the remainder of the year, cuts that previously lowered the benchmark from 1.75% back in year 2020. US inflation approached eight percent in February and could rise further, necessitating a quick pivot by the Federal Reserve to reset its monetary policy settings to a less stimulating calibration of the US economy that does not increase price pressures.

According to the technical analysis of the pair: The price of the USD/JPY currency pair may continue to move in limited ranges until the announcement of the US economic growth number and the number of US non-farm payrolls from ADP later today. So far, the general trend of the dollar-yen will remain bullish as long as it is stable above the 120.00 psychological resistance, and a clear break of this trend may occur if the currency pair moves towards the 118.50 support level, according to the performance on the daily chart.

In the same current path, the resistance levels will be 122.75 and 123.60, the closest targets. We still prefer to sell the dollar yen from each ascending level.

The United Kingdom is now one of the most affected countries by the advance of the coronavirus pandemic in Europe, with 634,920 total cases as well as a death toll of 43,018.

So far this week, the pound sterling has lost 1.16 percent against the US dollar, breaking a two-week gaining streak ahead of an EU leaders’ summit that took place on Thursday and Friday.

The EU leaders are set to discuss the Brexit negotiations and are expected to give instructions to the EU Chief Negotiator, Michel Barnier regarding which steps he should take in order to advance with the negotiations, as the year-end deadline approaches. The media has reported that they plan to say that the progress in talks with the United Kingdom is still not sufficient to reach a trade deal and that they’re instructing the Chief Negotiator to intensify the talks with the British government, they may be discussing which concessions they can make to the United Kingdom for the sake of advancing with the negotiations.

Britain insists on barring EU members from its fishing waters, a proposal that is considered outrageous given the United Kingdom’s aspirations to stay within the EU’s energy single market. About this issue, the German Chancellor, Angela Merkel commented that the European Union would need to be more “realistic” in compromising on fishing rights, highlighting that reaching a deal should be in the interests of both parts. Moreover, progress on talks about trade and security issues are now essentially stalled, which adds pressure.

The United Kingdom is now one of the most affected countries by the advance of the coronavirus pandemic in Europe, with 634,920 total cases as well as a death toll of 43,018. Given the recent surge in the number of cases, Prime Minister Boris Johnson announced a new three-tier restrictions system. Most of the country is currently on the lowest tier, though places like the Liverpool region will have to face the toughest restrictions.

On Monday, the Bank of England’s Governor, Andrew Bailey commented that the British economy could struggle more than expected to recover from the effects of the sanitary crisis in the economy.

“We think the risks, unfortunately, are all on the downside,” he said during a question and answer session. On Tuesday, after he was asked if the bank was planning to do so,  he added that for now, the bank is not discussing whether imposing negative cash rates, so currently, the bank’s monetary policy committee is not in a position to say if it is a tool they would employ.

Bailey’s claims come after the Bank of England policymaker, Jonathan Haskel said that the bank has an open mind about the possibility of cutting cash rates below zero, adding that despite the fact that it could affect the banking system’s profits, the measure could have a positive effect on the British economy as a whole.

The British Retail Consortium reported that retail sales rose by 6.1 percent in September (year-to-year), lower than expected, as the surveyed analysts foresaw it to rise by 8.2 percent, but higher than August’s figure, which stood at 4.7 percent.

On Tuesday, the Office for National Statistics recently reported that the Unemployment Rate from June through August 2020 stood at 4.5 percent, rising more than expected and higher than the previous period final number. The claimant count rate rose by 7.6 percent in September, while the number of unemployed people went up by 28,000. Average earnings remained unchanged in the three months to August, after dropping by 1 percent in the previous period. Excluding bonus, average earnings gained 0.8 percent, after going up by 0.2 percent in the previous period.