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USD/JPY Risks Larger Pullback on Dismal US GDP, Sticky Japan CPI

USD/JPY Risks Larger Pullback on Dismal US GDP, Sticky Japan CPI

2015-12-18 22:53:00
David Song, Strategist
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USD/JPY Risks Larger Pullback on Dismal US GDP, Sticky Japan CPIUSD/JPY Risks Larger Pullback on Dismal US GDP, Sticky Japan CPI

Fundamental Forecast for Yen:Neutral

Despite the 2015 Fed liftoff, USD/JPY stands at risk of facing range-bound prices in the week ahead as the final U.S. 3Q Gross Domestic Product (GDP) report is anticipated to show a downward revision in the growth rate, while the Bank of Japan (BoJ) largely endorses a wait-and-see approach for 2016.

The updated projections from the Federal Reserve suggests that the central bank will continue to normalize monetary policy in the year ahead as Chair Janet Yellen remains confident in achieving the 2% inflation target, and the 2016 committee may highlight a hawkish outlook for monetary policy especially as the U.S. economy approaches ‘full-employment.’ However, as the final GDP print is expected to show the U.S. economy expanding an annualized 1.9% during the three-months through September, a marked downward revision in the growth rate accompanied by a subdued reading for the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, may drag on interest rate expectations should the data prints undermine the central bank’s scope to implement higher borrowing-costs in the first-half of 2016.

In addition, an uptick in Japan’s core-core Consumer Price Index (CPI), which strips out food and energy costs, may encourage the BoJ to retain a wait-and-see approach at the next interest rate decision on January 29 as the region avoids a technical recession, while Governor Haruhiko Kuroda largely remains upbeat on the economy and anticipates a moderate recovery going forward. Even though the BoJ keeps the door open to further expand its quantitative/qualitative easing (QQE) program, it seems as though the bar remains high for a larger asset-purchase program as the board largely opts to tinker and fine-tune its policy tools rather than enlist a more aggressive approach to expand its balance-sheet.

With that said, a dismal U.S. GDP report paired with sticky inflation figures out of Japan may keep USD/JPY capped and produce a largely pullback in the week ahead as market participants gauge the monetary policy outlook for 2016. The lack of momentum to test the December high (123.66) following the Fed rate-hike may spur a move back towards the monthly low (120.33), with the pair at risk for a further decline going into 2016 as the BoJ disregards market expectations for a larger asset-purchase program.

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