Yen gains on BoJ remarks, dollar awaits key inflation data

BoJ’s Takata adds fuel to yen’s engines

The US dollar traded higher on Wednesday, but it seems to be cooling down today, as it is trading virtually unchanged or lower against most of its major peers, with the main gainer being the Japanese yen.

The wounded yen found some footing after Bank of Japan board member Hajime Takata said that the central bank must consider overhauling its ultra-loose policy as achieving the 2% inflation target is finally in sight despite the uncertainty of the economic outlook. He also highlighted the spring wage negotiations by adding that many companies are offering wage hikes higher than in the prior year.

With the BoJ repeatedly noting that the negotiations will be a key factor to consider at its future policy decisions, investors interpreted Takata’s comments as opening the door to an interest rate hike soon. What may have also injected some life into the yen is the release of the BoJ’s own core CPI metric, which showed that underlying price pressures remained unchanged at 2.6% y/y in January.

Although market participants are still fully pricing in a 10bps hike for June, the probability for April remained elevated at around 76%, while there is a 35% chance for the Bank to exit negative interest rates at the March gathering.

More evidence of sticky inflation could help the dollar

Dollar/yen fell back below the round number of 150.00 after Takata’s remarks, but it remains above the key support zone of 149.60, which could well attract buyers should the US data later today corroborate the Fed’s ‘higher for longer’ narrative.

After the CPI and PPI data suggested that inflation was stickier than expected in January, dollar traders are now likely to lock their gaze on the core PCE price index, the Fed’s favorite inflation gauge, which is accompanied by the personal income and spending numbers for the month.

An upside surprise in this inflation metric too, could prompt investors to further scale back their rate cut bets. Currently, they are assigning around an 80% chance for a 25bps reduction in June, with the total number of expected basis points worth of cuts by the end of the year standing at around 82, slightly more than the Fed’s own projection of 75. This means that there is still some room for upside adjustment to the market’s implied path.

The updated growth estimate of the Atlanta Fed GDPNow model for Q1 and the initial jobless claims for last week will also be released today. The latest estimate of the Atlanta Fed model pointed to a 3.2% growth rate and a revision close to that number today could add credence to the Fed’s view that there is no rush to start lowering interest rates anytime soon, especially if the jobless claims continue to point to a still-tight labor market.

The euro traded slightly higher today after both the French and Spanish preliminary CPI data revealed that, although inflation in these nations continues to slow, it is not cooling as fast as expected. However, Germany’s regional numbers are pointing to a larger slowdown, which may be confirmed later in the day by the CPI data for the whole country.

Wall Street slips ahead of PCE data, Bitcoin extends rally

On Wall Street, all three indices closed slightly in the red yesterday, with the tech-heavy Nasdaq losing the most. Perhaps investors decided to secure some profits following the latest rally that was fueled by Nvidia’s earnings, and ahead of today’s PCE data.

With the most important earnings results behind them, stock investors may now turn their attention back to macroeconomic data and monetary policy. Thus, evidence of stubborn inflation may result in a further retreat. However, a near-term pullback on Wall Street could prove to be just a correction rather than the beginning of a full-scale bearish reversal, inviting AI enthusiasts back into the action at more attractive levels.

In the crypto world, Bitcoin extended its rally yesterday, breaking above the round figure of $60,000 for the first time in more than two years. Although the crypto king pulled back after hitting $64.000, it rebounded again today. Bitcoin may be receiving support from consistent inflows into the new spot ETFs, but also due to speculation ahead of April’s halving event, which is a process designed to slow the supply growth of the cryptocurrency.