USD/JPY recovery extends beyond 145.50 with BoJ's tightening plans into question
- The US Dollar regains lost ground as investors consider the durability of the Middle East truce.
- The BoJ's summary of opinions casts doubt on upcoming rate hikes.
- Hopes of Fed cuts in the second half of the year are weighing on the US Dollar's recovery.
The US Dollar firmed up on Wednesday, as the market ponders the durability of the Middle East ceasefire, while the Yen declined across the board as the BoJ’s Summary of Opinions suggests that the bank might leave its monetary tightening plans in the drawer for some time.
The risk appetite seen on Tuesday following the truce between Israel and Iran has eased on Wednesday. A report by the US Intelligence stated that Tehran’s plans to enrich uranium have been delayed for just some months, instead of “obliterated” as President Trump said, has left investors wondering about the durability of the ceasefire.
Beyond that, the Summary of Opinions of the last meeting by the Bank of Japan revealed that the uncertainty about the impact of Trump’s tariffs caused a divergence among policymakers, which is likely to delay the bank's monetary tightening plans.
Hopes of fed cuts remain alive
BoJ policymakers showed increasing concerns about the high economic uncertainties and the upside risks from inflation and called for maintaining the accommodative policy for some more time. One member considered that the bank should keep hiking rates despite the uncertain context.
In the US, Fed Chair Jerome Powell reaffirmed his “wait and see” stance despite pressures from President Trump to cut rates.
The weak consumer sentiment data reñeased shortly afterwards, however, cemented hopes that the bank will cut rates twice this year, which are likely to keep the US Dollar’s upside attempts subdued.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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