What was supposed to be a strong week for the U.S. dollar turned into a crushing one for the greenback. Fed Chair Janet Yellen did not solidify her positive views, providing the dollar with the catalyst it needed to hit new highs. Instead, she expressed concerns about low inflation and these worries were confirmed by the last consumer price report. CPI growth stagnated in June and that caused the year over year CPI rate to drop to its lowest level in 8 months. Soft price growth wouldn’t be such a big problem if retail sales increased but instead of rising, spending contracted for the second month in a row by -0.2% in June. There was no support from auto and gas purchases, which also softened last month. So between the surprisingly weak U.S. economic reports and Yellen’s unimpressive performance on Capitol Hill, the U.S. dollar traded lower against all of the major currencies this week. On the first day of her testimony Yellen sent the dollar tumbling lower when she said inflation is running below their goal after having declined recently. On the second day the greenback recovered its losses after she recognized the improvements in the labor market and said while inflation has fallen it is “premature to say the underlying inflation trend is below 2%” because the “risk to inflation is two sided.” She also said, “nothing suggests that the expansion will die anytime soon.” Unfortunately with retail sales and CPI falling, no one seems to believe her. A September rate hike is completely off the table and investors will remain skeptical about December. Until data starts to improve consistently, investors will be reluctant to buy dollars especially in light of new opportunities presented by central banks who have just started to turn hawkish. So even if the Fed is one of only 2 central banks raising interest rates, fresh guidance from other countries could create renewed demand for those currencies at the expense of the U.S. dollar.
Bank of Japan monetary policy decision
The Bank of Japan is not expected to make any changes to its monetary policy at the conclusion of its two-day rate review on Thursday, as robust exports and private consumption heighten prospects of a moderate economic expansion.
According to sources, the Japanese central bank is likely to upgrade its economic assessment but cut its rosy inflation outlook, reinforcing expectations it will lag well behind major global central banks in dialing back its massive stimulus program.
BOJ Governor Haruhiko Kuroda will hold a press conference afterward to discuss the decision. He is likely to remind markets of the BOJ's resolve to maintain its ultra-easy policy until inflation is sustainably above 2%.
In addition, investors will focus on monthly trade data due Thursday, which could show Japanese exports rising for a seventh consecutive month.
Bank of Japan monetary policy decision
The Bank of Japan is not expected to make any changes to its monetary policy at the conclusion of its two-day rate review on Thursday, as robust exports and private consumption heighten prospects of a moderate economic expansion.
According to sources, the Japanese central bank is likely to upgrade its economic assessment but cut its rosy inflation outlook, reinforcing expectations it will lag well behind major global central banks in dialing back its massive stimulus program.
BOJ Governor Haruhiko Kuroda will hold a press conference afterward to discuss the decision. He is likely to remind markets of the BOJ's resolve to maintain its ultra-easy policy until inflation is sustainably above 2%.
In addition, investors will focus on monthly trade data due Thursday, which could show Japanese exports rising for a seventh consecutive month.
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Latest positioning data suggest markets are also turning bearish on the dollar with the first U.S. dollar shorts evident since May 2016. However, carry trades are flourishing with Japanese yen shorts at its highest level since June 2015.
