US Dollar at the Mercy of GDP Data, Yen Up as Markets Eye BOJ

TALKING POINTS – US DOLLAR, GDP, YEN, BOJ

• US Dollar looking to second-quarter GDP report for direction cues
• Forecasts see strong growth but recent data disappointments a concern
• Yen up as markets ponder policy change at next week’s BOJ meeting

US GDP figures are firmly in focus into the end of the trading week. They are expected to show that the annualized growth rate rose to 4.2 percent in the second quarter, the highest in almost four years. A strong print that boosts bets on a fourth Fed rate hike in 2018 is likely to be supportive for the US Dollar. A disappointment echoing recent deterioration in data outcomes relative to forecasts may send it lower.

The Japanese Yen outperformed in otherwise quiet Asia Pacific trade. The move tracked a pickup in local bond yields amid speculation that the BOJ might adjust its monetary policy settings at next week’s meeting. News reports circulating in recent days suggest officials are debating how best to insulate commercial banks from the adverse effects of longer-lasting stimulus as reflation struggles for momentum.

The central bank is reportedly weighing its options. The most aggressive scenario might see an increase in the 10-year JGB yield target or even the policy rate, now at 0 and -0.1 percent respectively. A softer alternative may be to adjust yield curve control tolerance thresholds, allowing rates to go higher before intervening. An even more gradualist approach may be to leave policy as-is but signal that changes are on the horizon.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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