JPY: significant volatility expected

The Federal Reserve has decided to maintain its interest rate unchanged for the fifth consecutive meeting.

A total of nine members opposed any adjustments, while three advocated for a modest quarter-point increase in the target range for the federal funds rate.

Ultimately, the decision resulted in the target rate remaining within the range of 3.5 percent to 3.75 percent.

The Fed believes that the economy is performing favourably, as job growth aligns with workforce expansion, and there are no significant fluctuations in the unemployment rate.

Nevertheless, concerns regarding persistently high inflation have been raised, worsening by the ongoing crisis in the Middle East, which has driven oil prices upward.

Despite these inflationary concerns, market understanding indicates that the Fed’s attempts to lower inflation may not be notably effective, as reflected by the 30-year Treasury yields reaching a 19-year peak.

The Fed’s choice to keep the benchmark rate stable, as determined by a 9-3 vote, represents the longest pause since 2008. The dissenting votes for a rate increase highlight one of the most controversial decisions among policymakers in recent years, leading market participants to speculate about a potential rate hike in August.

From the Fed’s perspective, the only encouraging data comes from June’s Personal Consumption Expenditures (PCE) index, their favoured inflation measure, which reported an increase of 3.7 percent, well above the core PCE inflation target of 2 percent.

Currently, market expectations lean towards the Fed raising rates in September, but participants are particularly focused on the forthcoming July jobs report, which could significantly influence these expectations. Therefore, payroll data will be subject to intensive analysis for future guidance.

Following a lacklustre jobs report for June, which recorded merely 57,000 new jobs, analysts anticipate a slight enhancement, projecting an increase of 91,000 jobs.

However, the unemployment rate is expected to rise from 4.2 percent to 4.3 percent. Notably, the addition of over 100,000 jobs could bolster the labour market, though it might also heighten the probability of the Fed implementing rate increases in September.

Chairman Kevin Warsh of the Fed has introduced complexity into the predictability of future policy adjustments by deliberately using forward guidance, thereby complicating investor’s assessments regarding the Fed’s forthcoming actions.

The persistent conflict in the Middle East and the uncertainty surrounding oil prices, which are anticipated to remain elevated without a resolution, further complicate the implications of rising interest rates on inflation within the United States.

Consequently, the Fed’s primary focus should be directed towards the dynamics of the 30-year bond yields, which introduce additional complexity into the trajectory of future interest rates.

In the foreign exchange market, the Japanese Yen (JPY) has demonstrated a noteworthy recovery. It has been consistently observed that the Yen has reached a critical threshold, potentially prompting intervention from the Japanese government to stabilise its currency.

The JPY has tested the 163.90-164 levels on multiple occasions, leading Japanese authorities to intervene on Thursday, resulting in a decline to well below the 158 levels against the US dollar.

The Japanese yen received an additional advantage, as market discussions suggest potential intervention by the Federal Reserve to support the value of the Japanese currency.

In addition to the Bank of Japan’s (BOJ’s) intervention, market participants are becoming increasingly anxious about the prospect of inflation in Japan surpassing the target rate of 2 percent.

The market, which previously anticipated a potential interest rate increase from the BOJ in December, will be closely evaluating upcoming data releases pertaining to wage growth and household spending scheduled for Wednesday and Friday.

This information could play a decisive role in influencing the likelihood of a rate adjustment in September or October.

Nonetheless, traders may contest the Japanese central bank’s current position, and it would not be unexpected to see the yen weaken against the dollar following a period of relative stability. The market is poised to scrutinize the BOJ’s commitment, particularly given the central bank’s historical reluctance to engage in frequent currency interventions, as government officials typically favour verbal policy strategies. Thus, there exists a probability that the USD/JPY exchange rate could exceed 160 unless it dips below 155.10 yen to the dollar to test 153.50.

Meanwhile, gold has faced challenges in its upward trajectory. This week, it saw a brief uptick following the Federal Reserve’s decision to maintain interest rates.

However, it was unable to surpass the resistance level of $ 4140. Over the weekend, renewed pressure was exerted due to ongoing geopolitical tensions in the Middle East and month-end demand for USD, both of which are anticipated to continue impacting financial markets adversely.

As long as geopolitical instability prevails and oil prices remain elevated, prospects for reduced inflation or rising gold prices appear limited. Whenever gold prices will rise, the risk of subsequent declines grows due to potential negative developments in the US-Iran conflict, which could provide justification for declines in gold prices.

This trend is anticipated to persist, with both gold and oil prices likely to experience upward movement as long as the current geopolitical situation remains unchanged.

WEEKLY OUTLOOK - Aug 3-7

#GOLD @ $4042.50- The challenge for gold this week will be to hold above the support level of $3965 to rise. The upside a break of $4140 will help to test $4195. Or else fall below the support levels risks for $3905.

#EURO @ 1.1528- Euro has risen significantly and is approaching a pivotal point. It’s anticipated to stay below 1.1580. However, if it drops below the support level of 1.1410, it may test the 1.1370 level. On the other hand, if support levels hold, it could recover and revisit 1.1510.

#GBP @ 1.3482- The Pound Sterling may rise to around 1.3520, but it is expected to remain under 1.3580-90 in order to trend downward. There are support levels at 1.3390 and 1.3340.

#JPY @ 157.58- This week, significant volatility is anticipated. On the downside, important levels to monitor are 156.20 and crucial support at 155.10. Meanwhile, a breach of 158.80 could lead it towards 159.90-00. Conversely, a break below key support may drive it down to 153.50.

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