The US dollar declined yesterday during the early American session as President Donald Trump once again asked the US Fed to slash interest rates in order to boost the economic growth. As speculators and investors were uncomfortable with the call, the USD/JPY fell from 111.40 to 111.05.
However, the greenback staged a recovery after the Fed maintained interest rates and Fed Chair Jerome Powell stated that politics did not play any role in policy decisions. The improvement was also aided by the release of a series of mixed economic data. After hitting a high of 111.66 earlier today, the USD/JPY pair was trying to consolidate at 111.50 levels at the time of writing this article.
On Tuesday, at the start of the US Fed policy meeting, President Trump tweeted that the US central bank should explore the option of slashing interest rates by a maximum of 1% from the current range of between 2.25% and 2.5%. Trump believes that such a move will enable the economy to set “major records.”
Trump tweeted: “Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go up like a rocket if we did some lowering of rates, like one point … with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!”
The strengthening economy encouraged Federal Open Market Committee members to boost benchmark rates nine times since 2015, with four rate hikes arriving under Powell’s leadership. But in 2019 the members of the rate-setting committee took a cautious stance, as growth fluctuated and inflation slipped below the committee’s 2% goal.
Recently, the Fed predicted only one rate hike in 2019 and no rate hikes in 2020. It also slashed economic growth forecasts for 2019 and 2020 U.S. growth.
The Fed concluded its two-day Federal Open Market Committee (FOMC) policy meeting yesterday. As widely anticipated, the central bank decided to maintain rates unchanged. The unanimous 10-0 decision resulted in the target range for the benchmark federal funds rate at 2.25% to 2.5%.
Regarding the weak inflation, Powell said: “We suspect that some transitory factors may be at work. Our baseline view remains that, with a strong job market and continued growth, inflation will return to 2 percent over time and then be roughly symmetric around our longer-term objective.”
Powell refuted allegations that the central bank is not raising rates due to political pressure. The Fed Chai said pointed out that the central bank is a “nonpolitical institution,” and members of the policy-setting committee will not bow to critics while making monetary policy decisions.
Regarding Powell’s statement on inflation, Michael Gapen, chief US economist at Barclays Plc., said: “What was news to me was the emphasis on transitory factors holding back inflation. That’s the part that’s likely to sound hawkish to a market that is expecting rate cuts.”
On the economic data front, the housing market holds steady, amidst the traditionally busy buying season. As per the Mortgage Bankers Association (MBA), the volume of applications for mortgages dropped by 4.3%, applications for refinancing a home slipped by 5%, and applications for mortgages to buy a home slid by 4%.
Notably, Tuesday’s economic release indicated that the S&P Case-Shiller Home Price Index gained by 0.2%, a notch lower than the 0.3% median estimate. Home sales in March rose 3.8%, crushing market estimates of 1.2% and above the 1% contraction reported in the prior month. Inflation stays subdued as rising labor costs were matched by increasing first-quarter housing prices.
The Bureau of Labor Statistics (BLS) reported that wages leaped 0.7%, perks climbed 0.7 %, and the overall Employment Cost Index inched upwards by 0.7%. Overall consumer confidence increased to 129.2 in April, up from March’s revised 124.2. The positive data and the Fed’s outlook on inflation are expected to keep the greenback bullish in the short-term.
Technically, the USD/JPY pair has found support at 111.35. The stochastic oscillator is in the bullish region. As a result, we can expect the currency pair to remain bullish during the next few days.
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