Japanese Yen treads water around 159.00 with US PCE Inflation on tap

USD/JPY wavers around 159.00 after pulling back from 159.45 highs on Tuesday.
Most USD crosses are trading within previous ranges, as investors brace for US PCE inflation data.
Higher hopes of BoJ tightening are providing some support to the Yen.

The Japanese Yen (JPY) ticks higher against the US Dollar (USD) on Wednesday but keeps looking for direction, as investors bide their time, awaiting an array of key US macroeconomic releases due later on the day. The USD/JPY chart pulled back from Tuesday’s high at 1.5945, but downside attempts remain contained above 158.40 so far.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

The main focus during the US session will be July’s Personal Consumption Expenditures (PCE) Price Index release. Brown Brothers Harriman’s Elias Haddad expects the report to “echo the soft July CPI and retail sales data, giving the Fed room to stay on hold.” Consensus looks for “headline PCE… rising 0.1% m/m vs. -0.1% in June to be 3.6% y/y vs 3.7% in June,” while “core PCE is expected to rise 0.2% m/m vs. 0.1% in June and remain at 3.3% y/y for a second straight month.”

In parallel, BBH notes that “real personal spending is expected at 0.0% m/m vs. 0.4% in June,” reinforcing the picture of moderating demand that underpins their view of a steady policy stance.

Apart from that, the first estimate of the US second quarter's Gross Domestic Product (GDP) is expected to confirm preliminary data showing that economic growth slowed down to a 1.5% annualized rate, from 2.1% in the previous quarter.

Yen firm as markets lean toward BoJ hike

In Japan, all eyes are on the advanced Tokyo Consumer Price Index (CPI) release, which will be carefully watched to confirm market expectations of a Bank of Japan (BoJ) rate hike in September.

Analysts at MUFG note that the Yen is trading firmer against most G10 peers this morning, except the Aussie, as “market pricing indicates a continued gradual strengthening of expectations that the BoJ will hike in September.” That view is reinforced by former BoJ policy board member Seiji Adachi, who, in an interview with Bloomberg, “stated that the BoJ will likely raise rates in September and again in January.”

Regarding the US Federal Reserve (Fed), MUFG argues that “if there is no strong steer by Warsh on a hike in September (which seems likely), we would likely see front-end rates soften a little in the US and coupled with strong expectations of a BoJ rate hike could provide some impetus for a further decline in USD/JPY.”

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

Economic Indicator

Personal Consumption Expenditures - Price Index (YoY)

The Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.