Today’s Market Outlook Will Diverging U.S. and Japanese Monetary Policy Push USD/JPY Lower? Focus on U.S. Retail Sales T

Today’s Market Outlook
Will Diverging U.S. and Japanese Monetary Policy Push USD/JPY Lower? Focus on U.S. Retail Sales Today

■ Market Summary

The key focus in overseas markets today will be how changes in expectations for U.S. and Japanese monetary policy affect USD/JPY.

Toward the end of the Tokyo session, reports emerged that the Bank of Japan may consider raising rates as early as September and could also accelerate the pace of tightening. This prompted yen buying and pushed USD/JPY lower.

Following the coordinated U.S.-Japan intervention, the U.S. side has also indicated that it expects the Bank of Japan to continue monetary normalization in order to address excessive yen weakness. As a result, market expectations for a September BOJ rate hike are gradually increasing.

Meanwhile, U.S. inflation indicators released this week have been relatively subdued, reducing expectations for a September FOMC rate hike.

If the BOJ is expected to move toward further rate hikes while the Federal Reserve is expected to keep rates unchanged, expectations for a narrowing U.S.-Japan interest-rate gap may increase. This would make USD/JPY more vulnerable to downside pressure.

However, factors supporting yen weakness remain in place, including risk appetite driven by higher equity prices, persistent yen carry trades, Middle East developments, and elevated oil prices.

■ USD/JPY

USD/JPY is trading around 159.15 in the London morning session.

Dollar selling has been slightly dominant, with the pair extending its intraday low to around 159.07. Although USD/JPY remains above 159.00, momentum toward 160.00 has weakened compared with earlier sessions.

The main background is the growing expectation of a September BOJ rate hike, combined with fading expectations for a September Fed rate hike.

If the BOJ moves toward an additional rate hike sooner than expected while the Fed is expected to leave policy unchanged, the U.S.-Japan interest-rate gap will be seen as narrowing. If this policy shift becomes more fully priced in, USD/JPY may struggle to remain in the 159 range and could correct toward 158.00.

On the other hand, demand for yen carry trades has not fully collapsed even after the coordinated intervention. Dollar buying and yen selling are therefore still likely to emerge during declines.

■ Expectations for a September BOJ Rate Hike

Reports late in the Tokyo session suggested that the BOJ is considering a rate hike as early as September and may also accelerate the pace of tightening.

This prompted yen buying in the market.

Until now, the prevailing view had been that the BOJ would proceed cautiously with further rate hikes. However, following the U.S.-Japan coordinated intervention, the U.S. side has also signaled support for further BOJ monetary normalization as a way to address yen weakness.

If import prices continue to rise because of the weak yen, it may become easier for the BOJ to justify another rate hike.

If the market begins to seriously price in a September hike, rising Japanese short-term rates could strengthen yen-buying pressure. Attention should now turn to comments from BOJ officials, as well as domestic inflation and wage data, to assess the likelihood of a September move.

■ Expectations for a September Fed Rate Hike

In the United States, expectations for a September rate hike have declined.

Current CME FedWatch pricing is as follows:

● No change: 67.6%
● 0.25% rate hike: 32.4%

This week’s U.S. CPI and PPI data have been relatively subdued, pushing rate-hike expectations well below 50%.

Until recently, the market was placing significant weight on the possibility of a September hike. The base case has now shifted toward the Fed keeping rates unchanged.

If this trend continues, upside room for U.S. short-term rates may remain limited, weighing on the dollar. The combination of stronger BOJ hike expectations and fading Fed hike expectations represents an important change for USD/JPY.

■ U.S.-Japan Interest-Rate Gap

One of the main drivers of USD/JPY’s rise has been the large absolute interest-rate gap between the United States and Japan.

This gap has supported yen carry trades, in which investors sell the low-yielding yen to buy higher-yielding currencies.

However, if markets begin to price in a September BOJ hike and a September Fed hold at the same time, the expected path of the U.S.-Japan rate gap will shift toward narrowing.

The actual interest-rate gap remains large, making an immediate unwinding of carry trades unlikely. What matters, however, is not only the current size of the gap, but the direction in which markets expect it to move.

If the divergence in policy direction becomes clear, investors may gradually reduce yen-short positions.

■ Dollar Market

Dollar selling is slightly dominant in the London morning session.

USD/JPY fell to around 159.07, while EUR/USD rose to around 1.1558. EUR/USD is trading near 1.1555, indicating modest dollar weakness against major currencies.

The U.S. 10-year Treasury yield has paused around 4.65%, reducing the incentive to buy the dollar aggressively on yield grounds.

If today’s U.S. retail sales data fall short of expectations, concerns over a slowdown in the U.S. economy and expectations for a September Fed hold could strengthen further, leading to more dollar selling.

Conversely, a significantly stronger-than-expected result could highlight the resilience of the U.S. economy and trigger dollar buying.

■ U.S. Retail Sales

July U.S. retail sales will be the main focus in the U.S. session today.

Market expectations are as follows:

● Retail sales month-on-month: +0.1%
Previous: +0.2%

● Retail sales excluding autos month-on-month: +0.2%
Previous: -0.2%

Headline retail sales are expected to slow slightly from the previous month, while the ex-autos figure is expected to improve.

At these forecast levels, the data do not point clearly to either strong or weak U.S. economic momentum. Therefore, a result close to expectations may have only a limited impact on the dollar.

However, a substantial deviation from forecasts could affect expectations for the September FOMC meeting.

■ U.S. Retail Sales Scenarios

Strong Result

If both headline and ex-autos retail sales exceed expectations, this would confirm resilient U.S. consumer spending.

September rate-hike expectations could recover modestly, supporting U.S. yields and the dollar. USD/JPY could then rebound toward the upper 159 range.

Weak Result

If both headline and ex-autos figures fall below expectations, concerns over a U.S. economic slowdown are likely to increase.

Together with the recent moderation in U.S. inflation data, this could further strengthen expectations for the Fed to keep rates unchanged and lead to more dollar selling.

In this case, USD/JPY may fall below 159.00 and test the 158 range.

In-Line Result

If the data are close to expectations, the market reaction is likely to be limited.

Attention would then return to U.S.-Japan monetary-policy expectations, Middle East developments, U.S. yields, and equity markets.

■ University of Michigan Consumer Sentiment Index

The preliminary August University of Michigan Consumer Sentiment Index will also be released.

The market expects a reading of 55.0, slightly lower than the previous 55.2.

In addition to the headline figure, attention should be paid to consumer inflation expectations. Inflation concerns have eased somewhat following this week’s CPI and PPI data.

If inflation expectations in the Michigan survey rise, U.S. Treasuries and the dollar could react. If they also remain subdued, this would reinforce expectations for the Fed to keep rates unchanged in September.

■ Middle East Developments and Oil Market

Middle East developments remain a complicating factor for the yen.

NY crude oil futures have edged lower into the upper $81 range but remain at elevated levels.

Higher oil prices increase import costs and worsen Japan’s terms of trade, making them a factor that can weigh on the yen. At the same time, higher oil prices may increase concerns about renewed U.S. inflation and support U.S. yields.

Therefore, another rise in oil prices could limit USD/JPY downside that would otherwise be driven by diverging U.S. and Japanese monetary-policy expectations.

If Middle East tensions worsen again, risk-off yen buying and dollar buying or yen selling driven by higher oil prices could occur at the same time, creating more complicated price action.

■ Equity Market

Germany’s DAX is up around 0.7%, showing relatively firm performance. Meanwhile, major UK and French indices are trading near the previous day’s closing levels.

U.S. equities also remain near elevated levels, and risk appetite has not deteriorated significantly.

Higher equity prices support yen carry trades and can encourage yen selling. As a result, expectations for Japanese policy tightening are supporting the yen, while equity-market strength supports yen selling, making USD/JPY direction more difficult to assess.

■ Other Economic Indicators

The following data are also scheduled for release later today:

● Revised Eurozone GDP
● Eurozone trade balance
● U.S. business inventories
● Canadian manufacturing sales
● Canadian wholesale sales

Attention will remain focused on U.S. retail sales and the University of Michigan Consumer Sentiment Index. Unless other data show major deviations from expectations, their broader market impact is likely to be limited.

■ Key Points for the London and New York Sessions

① Whether expectations for a September BOJ rate hike strengthen further
② Whether the 32.4% probability of a September Fed rate hike declines further
③ Whether USD/JPY can hold above 159.00
④ Whether USD/JPY falls below 159.00 toward the 158 range
⑤ Whether U.S. retail sales exceed expectations
⑥ Inflation expectations in the University of Michigan survey
⑦ Whether the U.S. 10-year yield falls below 4.65%
⑧ Whether NY crude oil futures rise back above $82
⑨ Whether demand for yen carry trades remains supported by higher equities

■ Summary

The main focus for USD/JPY today is the shift in U.S. and Japanese monetary-policy expectations.

Reports indicate that the BOJ may raise rates as early as September and may consider accelerating the pace of tightening. This has gradually strengthened market expectations for a September BOJ rate hike.

In contrast, subdued U.S. inflation data this week have reduced the probability of a September FOMC rate hike to 32.4%, while the probability of no change has risen to 67.6%.

If the BOJ is seen as moving toward rate hikes while the Fed is seen as remaining on hold, expectations for a narrowing U.S.-Japan interest-rate gap are likely to place downside pressure on USD/JPY.

In the London session, dollar selling has already emerged, pushing USD/JPY toward 159.07.

However, risk appetite driven by higher equities, persistent yen carry trades, and elevated oil prices continue to support yen weakness.

Strong U.S. retail sales could trigger a dollar rebound, while weak data could further strengthen expectations for a September Fed hold and increase the risk of USD/JPY falling below 159.00 toward the 158 range.

The market will now assess whether the widening gap between expected BOJ and Fed policy paths begins to exert more sustained downside pressure on USD/JPY.