25 July, AtoZForex – According to Commerzbank, market participants still accord a probability of less than 50% of a rate hike this year. Hence, the Federal Reserve meeting this week is bound to come with quite a bit of frenzy as many yardsticks show the US is ripe for another rate hike. The Bank of Japan is also due for policy meetings this week. These events will no doubt affect the outlook of the USD and JPY currencies.
Fed policy expectations
Speaking of the US dollar, the currency has gained strongly in the past few weeks, buoyed by upbeat data and higher expectations of rate hikes. Here is Thu Lan Nguyen, analyst at Commerzbank:
“The US dollar has seen large gains in the last few days, with tailwinds coming from rising rate hike expectations in particular. The market-implied probability of a rate hike by the Fed by the end of this year has now almost returned to levels seen before the Brexit referendum. One reason for this is that markets have generally calmed since the Brexit shock, which means that global risk perception has declined significantly. What is more, recent US economic data having surprised to the upside has restored investor confidence in an imminent rate hike by the US central bank.”
Hence, the continuation of the USD strength is dependent on the continuation of positive US data, like the advance GDP report due this week. Also, the Fed decision and tone regarding rate hike will be a key driver of the greenback.
BOJ policy expectations
As for the JPY outlook and the BOJ policy expectations, it will be another key week. The yen has been driven lately by anticipation of helicopter money as well as the re-election of prime minister Shinzo Abe and the continuation of Abenomics. Commerzbank analysts again opine that:
“Next week will also get exciting with regard to the JPY exchange rates. The depreciation of the JPY versus the USD in recent weeks was not only due to the general dollar strength. Another factor that has been exerting pressure on the yen is speculation that the Bank of Japan (BoJ) will ease monetary policy further at its meeting next Friday.”
The JPY will no doubt be strongly influenced by the outcome of this meeting, considering the fact that expectations regarding the BoJ are now quite high.
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