Forex Top Team

JPY on the brink of a widening US-Japan interest rate gap, but what about the ECB Council meeting?

The Japanese yen has weakened in the Tokyo market following the passage of yesterday’s US Federal Open Market Committee (FOMC) meeting. USD/JPY has reached the 141 yen level, which raises concerns about the government’s warning against excessive yen weakness. The FOMC meeting resulted in no change in policy interest rates as expected, but the indication of two additional rate hikes in the FOMC members’ interest rate projections increased hawkish sentiment. On the other hand, the Bank of Japan’s policy meeting scheduled for this Friday is expected to maintain its current accommodative policy centered around yield curve control (YCC). As US rate hike expectations have increased, expectations for a widening of the interest rate differential between Japan and the US have also grown, supporting the notion of further yen weakness.

Today, the results of the European Central Bank (ECB) policy meeting will be announced. The market has priced in a 25 basis point rate hike. However, there are signs that inflation is gradually calming down, so there may not be a strongly bullish stance taken. On the other hand, if the rate hike is implemented, it will lead to an expansion of the interest rate differential between Japan and Europe, which would provide support for the EUR/JPY exchange rate. However, in the EUR/USD exchange rate, there may be a potential decline in the euro if the difference in additional rate hike stance between the ECB and the FOMC is emphasized. It would be important to check the sentiment expressed by ECB President Lagarde during the press conference.

There are several economic indicators to be released in the overseas markets, with a focus on the United States. These include initial jobless claims (06/04 – 06/10), import prices (May), New York Fed Manufacturing Index (June), Philadelphia Fed Manufacturing Index (June), industrial production (May), business inventories (April), and securities investment from foreign countries (April). Although these indicators come after the FOMC meeting, if the results tend to be weaker than expected, it could trigger a correction in the previously bought US dollar. It is important to be cautious of such possibilities.

Regarding speaking events, the key event will be ECB President Lagarde’s press conference, and there are also speeches and event participation scheduled by other central bank officials, such as President Weidmann of the Bundesbank, President Bullard of the St. Louis Fed, Deputy Governor Cunliffe of the Bank of England, and Governor Villeroy de Galhau of the Bank of France.

Given the mix of various indicators and the complexity of the current situation, the plan is to observe the outcomes of the ECB policy meeting, Lagarde’s press conference, and the US retail sales data before making any moves.