Upcoming Japanese Data to Drive the USD/JPY Pair
Risk aversion allowed the safe-haven US dollar and the lower-yielding Japanese yen to regain ground against most of its forex counterparts, as global growth concerns weighed on sentiment. Euro zone data continued to disappoint, reminding market participants that a recession is likely to take place and hurt economic performance in its trade partners.
In particular, the BOE minutes highlighted the potential risks of a euro zone slowdown and the upcoming central bank events this week should show how other policymakers are assessing the situation. These top-tier events include the FOMC statement, RBNZ decision, and BOJ policy announcement.
During their previous statement, the FOMC shifted to a less upbeat stance, as Fed Chairperson Yellen downplayed the likelihood of seeing an interest rate hike next year. In fact, a few Fed officials even suggested delaying the end of the taper program until the end of the year. Bear in mind that the US central bank is set to end stimulus in this week’s rate statement, trimming asset purchases by the final $15 billion. Should they decide against this, the US dollar might wind up erasing its latest gains.
Meanwhile, the RBNZ is expected to sit on its hands and refrain from announcing any monetary policy changes. Analysts project that this wait-and-see stance would be sustained possibly throughout 2015, as the New Zealand economy is still dealing with the effects of falling commodity prices, particularly in the dairy sector. Apart from that, the RBNZ might also follow suit with other major central banks and express concerns about global inflation and the potential euro zone recession.
As for the BOJ, policymakers are still widely expected to retain their cautious assessment of the Japanese economy but stop short of confirming that more stimulus is necessary. After all, there have been a few signs of improvement in Japan, particularly in the trade and manufacturing sectors. However, should the BOJ also give a more dovish statement just as most other central banks are doing, yen pairs might start to resume their climb.
Other major events lined up for the week include euro zone reports, most of which are slated to show disappointing figures. This could keep the euro weak against most of its forex counterparts throughout the trading week, as traders continue to price in expectations of further ECB easing.
Germany will release its Ifo business climate reading and possibly show another decline, which would reflect weaker confidence. CPI readings from the large euro zone economies, such as Germany and Spain, should also have a say in euro price action. Bear in mind that deflation is starting to emerge as a global concern, with some central banks aiming to weaken their local currency in order to spur price pressures. The euro zone flash CPI estimates are up for release towards the end of the week and this might seal the deal on whether or not further ECB easing might happen.
GDP releases should also dominate forex market price action, particularly among the dollar pairs. The US will release its advanced GDP figure for Q3 2014 and possibly confirm if economic performance did pick up in the period. Recall that the previous quarter’s GDP reading was upgraded from 4.0% to 4.6% so it’s likely that a bit of correction might be seen.
More data from Japan is due and this should show if the economy indeed recovered from the sales tax hike. Policymakers had been confident that Japan would see a strong rebound in Q3, eliminating the need for BOJ stimulus. If the CPI, household spending, retail sales, and jobs data confirm this, the yen might be in for a stronger rally.