Today’s Market Outlook US Data and Japan’s Intervention Record in Focus; USD/JPY May Probe Lower

Today’s Market Outlook

US Data and Japan’s Intervention Record in Focus; USD/JPY May Probe Lower

Market Overview

Overseas markets will be assessing a range of factors, including US economic data, comments from Federal Reserve officials, Japan’s foreign exchange intervention record, developments in the Middle East and oil prices.

The dollar is facing modest selling pressure. The dollar index rose to 101.465 during the Tokyo session but retreated to 101.195 in London. EUR/USD and GBP/USD are trading above their previous New York closes, reflecting a pullback in the dollar’s recent strength.

However, the dollar index remains well above its 10-day moving average at 100.863, a level that is providing short-term support. It is difficult to conclude that the dollar’s uptrend since mid-September has ended. For now, the move appears to be a correction following the recent advance.

USD/JPY may probe lower in the short term as falling oil prices, reduced expectations for US rate hikes and intervention concerns weigh on the pair. However, strong US data today could still revive dollar buying.

US Economic Data

Several important US economic releases are due today:

• MBA Mortgage Applications
• ADP Employment Change
• Personal Income and Personal Spending
• PCE Price Index
• Advance Wholesale Inventories
• Final second-quarter GDP
• Chicago PMI

With the US employment report due at the end of the week, September’s ADP employment report will be the first major focus. The market expects an increase of 75,000, up from the previous rise of 38,000.

After yesterday’s weaker US job openings data, the probability of a rate hike at the next FOMC meeting has fallen to around 50%. If ADP employment exceeds expectations, the resilience of the labour market may be reassessed, potentially reviving US rate-hike expectations and dollar buying.

Conversely, a weaker result could heighten concern ahead of the employment report later this week, putting downward pressure on US yields and the dollar.

PCE Price Index

The August PCE Price Index is expected to rise 0.3% month-on-month and 3.7% year-on-year.

The monthly increase is forecast to accelerate from the previous 0.2%, while the annual rate is expected to remain at the same elevated level. Confirmation that inflation pressures are not easing would support expectations for further rate hikes.

If PCE inflation comes in above expectations, the dollar could recover even if the ADP employment result is somewhat weak, as inflation concerns would remain in focus.

On the other hand, if PCE inflation undershoots expectations and ADP employment is also weak, rate-hike expectations could fall sharply, potentially accelerating dollar selling.

Both employment and inflation data will need to be assessed today. If the releases send mixed signals, markets are likely to swing in both directions.

Chicago PMI and the US Economy

The September Chicago PMI is expected to improve to 51.0 from 47.1, moving above the 50 threshold that separates expansion from contraction.

An improvement in line with expectations would point to resilience in the US economy. If the ADP employment report and PCE data are also strong, it would be easier to confirm that the dollar’s uptrend remains intact.

However, if the index remains below 50, it could reinforce the view that high interest rates and elevated oil prices are weighing on business activity, weakening dollar-buying momentum.

USD/JPY

USD/JPY may probe lower in the short term.

Rate-hike expectations have eased following yesterday’s weak US job openings data, while oil prices have fallen this week. Lower oil prices reduce US inflation concerns and ease worries about the deterioration in Japan’s terms of trade. This combination can weigh on USD/JPY through both dollar selling and yen buying.

Japan will also publish its foreign exchange intervention data today. Confirmation that actual yen-buying intervention took place—not just the rate checks reported by the market—would have a significant impact.

Even if no direct intervention is confirmed, the government’s strong concern about the foreign exchange market remains clear. Intervention risk is likely to continue capping USD/JPY on rallies.

However, if the ADP employment report, PCE Price Index and final GDP figures are all strong, USD/JPY could rebound alongside higher US yields. Even if looking for further downside, traders should be alert to sharp rebounds around the US data releases.

Bank of Japan and Japanese Government Bonds

The Bank of Japan will announce its planned government bond purchases for October through December.

If the reduction in purchases is larger than the market expects, Japanese government bond yields could rise. Expectations of a narrower Japan-US yield differential may then strengthen yen buying.

Conversely, if the Bank of Japan takes a cautious approach aimed at limiting the rise in long-term yields, yen buying could ease temporarily.

The reaction in Japanese long-term yields, as well as US yields, will be important in determining the direction of USD/JPY today.

Oil and Middle East Developments

Oil prices have been falling this week.

Iran’s foreign minister has said that Iran received the US response to a peace proposal, with discussions expected to take place on the Iranian side. If hopes for peace talks grow, supply concerns could ease, putting further downward pressure on oil.

Continued weakness in oil could reduce both US inflation concerns and safe-haven demand for the dollar, limiting the dollar’s upside.

Conversely, reports of stalled negotiations could trigger a sharp rebound in oil and revive dollar buying. Traders should also monitor Middle East headlines alongside today’s US weekly petroleum inventory data.

The Euro and Sterling

In European trading, sterling will be in focus following strong UK GDP data.

If the resilience of the UK economy remains in focus, GBP/USD may rise, reinforced by the current correction in the dollar. However, concerns about high inflation and the UK’s fiscal position remain significant, so the sustainability of any advance should be assessed carefully.

In the euro area, German employment data and the preliminary September German CPI will be released.

German CPI is expected to rise 0.5% month-on-month and 3.1% year-on-year, accelerating from the previous readings. An upside surprise could support expectations for ECB rate hikes and encourage euro buying.

EUR/GBP has recently fallen following the strong UK GDP data, but firm German CPI could prompt a recovery in the pair.

Federal Reserve Officials

During the New York session, remarks are scheduled from Richmond Fed President Thomas Barkin, Fed Governor Lisa Cook, Chicago Fed President Austan Goolsbee and Minneapolis Fed President Neel Kashkari, among others.

The key questions are how much weight officials place on yesterday’s weak job openings data and how they assess elevated oil prices as an inflation risk.

A series of cautious comments on further rate hikes could extend dollar selling. Conversely, if officials signal that additional hikes are needed to contain inflation, dollar selling after the data releases could reverse.

Key Points for Overseas Markets

• Whether ADP employment exceeds the expected increase of 75,000
• Whether the PCE Price Index comes in above expectations
• Whether the Chicago PMI moves back above 50
• Whether the implied probability of a rate hike at the next FOMC meeting rises again
• Whether Japan’s intervention data confirms direct currency intervention
• The BOJ’s bond-purchase policy and Japanese government bond yields
• Whether Iran-US peace talks make progress
• Whether oil prices continue to fall after the US weekly petroleum inventory report
• Whether German CPI prompts euro buying
• Whether the dollar index holds above its 10-day moving average at 100.863

Expected Scenario

The main scenario is for the dollar’s broader uptrend to remain intact, while USD/JPY probes lower amid US data risk and intervention concerns.

If both ADP employment and PCE inflation are weak, reduced US rate-hike expectations, falling oil prices and intervention concerns could combine to accelerate USD/JPY’s decline.

Conversely, if employment, inflation and business activity all come in strong, dollar buying could resume alongside higher US yields. However, intervention concerns will remain during any advance in USD/JPY, meaning the pair may not rise as smoothly as the dollar index.

Summary

The dollar index has retreated today, but its broader uptrend since mid-September remains intact. The 10-day moving average is still well below the current level, so the latest move is better viewed as a correction after the advance than as a reversal in the dollar’s trend.

USD/JPY, however, faces several yen-supportive factors: lower oil prices, reduced US rate-hike expectations, the BOJ’s bond-purchase policy and the release of Japan’s intervention record. As a result, the pair may be more vulnerable to downside pressure than other major currencies.

The main question for the rest of the session is whether ADP employment and the PCE Price Index will reignite dollar strength or further reduce expectations for US rate hikes. With several major data releases and central-bank comments due, choppy two-way trading is more likely than a sustained move in one direction.