USD/JPY wobbles around 147.50 ahead of US producer inflation data
- USD/JPY consolidates around 147.50 as investors await US PPI data for August.
- The Fed is certain to cut interest rates in the policy meeting next week.
- The Japanese economy faces a political crisis amid PM Ishiba’s resignation as LDP leader.
The USD/JPY pair trades in a tight range around 147.50 during the European trading session on Wednesday. The pair consolidates as investors await the United States (US) Producer Price Index (PPI) data for August, which will be published at 12:30 GMT.
Investors will closely monitor the US PPI data to get cues about the size of interest rate cut by the Federal Reserve (Fed) in its policy meeting next week, with traders remaining confident that the central bank will lower key borrowing rates.
According to the CME FedWatch tool, traders see an 8.4% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.75%-4.00%, while the rest point a standard 25-bps interest rate reduction.
Economists expect the US headline PPI to have grown steadily at an annualized pace of 3.3%. Meanwhile, the core PPI – which excludes volatile food and energy items – is estimated to have risen moderately by 3.5%, against 3.7% in July.
Ahead of the US PPI data, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades calmly near 97.80.
Meanwhile, the Japanese economy is facing a deep political crisis after the resignation of Prime Minister Shigeru Ishiba from his post as president of the Liberal Democratic Party (LDP). Ishiba stepped down after his opponents at LDP called on him to take responsibility for the party’s losses and for his incompetence in the trade deal with Washington.
Going forward, investors will focus on the Bank of Japan’s (BoJ) monetary policy announcement next week.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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