According to Bloomberg Economics, the monthly U.S. consumer price report, which is due out today, will show subdued core inflation for the third month in a row. This forecast strengthens the case against further interest rate hikes by the Federal Reserve.
Another tepid advance for prices excluding food and energy of 0.2% in August would probably be more important to Fed officials than an energy-driven rebound in the overall consumer price index, which may have risen 0.6%.
“Monthly headline inflation should be robust, while annualized core inflation will stay near the Fed’s 2% inflation target for a third straight month — the longest stretch of subdued core readings since inflation surged in early 2021,” Bloomberg Economics notes.
Slowing core inflation over the last two months has raised hopes that the Fed will cease rate increases after lifting the target range for its benchmark in July to 5.25–5.5%, the highest level in 22 years.
Investors currently see the chances of another rate hike in 2023 as a bit below 50%, according to futures.
While central bank officials including Fed Chair Jerome Powell have welcomed the progress seen in recent inflation reports, they have also stressed that the fight isn’t over, and warned that ongoing strength in the economy could require another rate increase.
The yen remains vulnerable to sharp movements and government intervention, even after its rally at the start of this week, as key U.S. data and central bank meetings loom large among potential catalysts.
U.S. inflation figures set to be released on Wednesday are expected to show price growth accelerating for a second month in August versus a year earlier.
If headline price growth outpaces the consensus for a 3.6% gain, reignited speculation over another U.S. interest rate hike might boost the dollar and return the yen to fresh year-to-date lows.
As for the Asian counterweight to the U.S. dollar, the Japanese yen, the situation could be as follows:
The rate of any fall in the yen is likely to be key to whether Japan's Finance Ministry officials respond by stepping up warnings or considering policy tightening measures.
Last year Japan had to spend more than $60 billion on three interventions before the tide turned in its favor and the dollar pulled back from a multi-year high of 151.95 yen. Convincing international allies to re-enter markets this year may be more difficult as the gap in interest rates is now even wider than in 2022.
The current market sentiment is similar to the situation a year ago, when the sharp weakening of the yen in USDJPY triggered the Japanese authorities to launch the first yen-buying operations since 1998.
The main argument against intervention in the near term is that the strong contrast between the Bank of Japan's dovish rate and the U.S. Federal Reserve's rate at 5.38% supports a weak yen.
Most market participants probably believe that USDJPY's rise is in line with fundamentals.
Unlike a year ago, one factor that may help Japan to defend the yen is the growing perception that the BOJ is getting closer to reducing its ultraeasy policy under a new governor.
Governor Kazuo Ueda said in an interview published on Saturday that ending negative interest rates might be among the options if inflation and wages keep rising. By the end of the year the BOJ may have enough information on both of these issues, he added. The comments boosted support for the yen on the hopes of higher interest rates.
But Ueda also said the bank is still at some distance from achieving its price target and that easing should continue for now. These comments will put additional downward pressure on the yen if they are to be repeated at the policy meeting next week.
The BOJ's next meeting will conclude on September 22, and the Federal Reserve will end its two-day meeting on September 20. Japan's first intervention last year followed the Fed and BOJ meetings in September.
Currency traders and corporate officials do not see a break in the weakening trend anytime soon, with the 150 level of USDJPY considered a trigger for potential intervention. As of late August, Japan had $1.25 trillion in foreign reserves, which the country could use to support its currency.
The final recommendation is to sell USDJPY if the quotes reach the 150 level. Profit or loss should be taken after two trading days.