---The Japanese Yen appreciates as increasing Tokyo inflation figures strengthen the BoJ’s hawkish stance on its policy outlook.

---Tokyo's CPI rose to 2.6% YoY in August, up from 2.2% in July.

---The US Dollar holds its ground following stronger-than-expected economic data from Thursday.

The Japanese Yen (JPY) retraces its recent gains against the US Dollar (USD) following the Tokyo Consumer Price Index (CPI) data released on Friday. The increase in Tokyo inflation strengthens the Bank of Japan’s (BoJ) hawkish monetary policy stance, supporting the JPY and putting downward pressure on the USD/JPY pair.

Tokyo's Consumer Price Index (CPI) increased to 2.6% year-on-year in August, up from 2.2% in July. Core CPI also rose to 1.6% YoY in August, compared to the previous 1.5%. Additionally, Japan’s Unemployment Rate unexpectedly climbed to 2.7% in July, up from both the market estimate and June's 2.5%, marking the highest jobless rate since August 2023.

The downside for the USD/JPY pair may be capped, as the US Dollar maintains its recent gains following stronger-than-expected economic data released on Thursday. However, dovish remarks from the Federal Reserve could constrain further gains for the Greenback.

Investors await July’s US Personal Consumption Expenditure (PCE) Price Index scheduled to be released later in the North American Session, seeking clues about the future direction of US interest rates.

Market Movers: Japanese Yen inches higher following Tokyo inflation data

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Fed at its September meeting.

Federal Reserve Atlanta President Raphael Bostic, a prominent hawk on the FOMC, indicated on Thursday that it might be "time to move" on rate cuts due to further cooling inflation and a higher-than-expected unemployment rate. However, he wants to wait for confirmation from the upcoming monthly jobs report and two inflation reports before the Fed's September meeting.

The US Gross Domestic Product (GDP) grew at an annualized rate of 3.0% in the second quarter, exceeding both the expected and previous growth rate of 2.8%. Additionally, Initial Jobless Claims showed that the number of people filing for unemployment benefits fell to 231,000 for the week ending August 23, down from the previous 233,000 and slightly below the expected 232,000.

US Core Personal Consumption Expenditures (QoQ), the Federal Reserve's preferred measure of underlying inflation, increased by 2.8% in the second quarter, slightly below the market forecast of 2.9%. This marks a significant deceleration from the 3.7% growth observed in the first quarter.

Japan’s Finance Minister Shunichi Suzuki stated on Tuesday that foreign exchange rates are influenced by a variety of factors, including monetary policies, interest rate differentials, geopolitical risks, and market sentiment. Suzuki added that it is difficult to predict how these factors will impact FX rates.

Bank of Japan (BoJ) Governor Kazuo Ueda addressed the Japanese parliament on Friday, stating that he is “not considering selling long-term Japanese government bonds (JGBs) as a tool for adjusting interest rates.” He noted that any reduction in JGB purchases would only account for about 7-8% of the balance sheet, which is a relatively small decrease. Ueda added that if the economy aligns with their projections, there could be a phase where they might adjust interest rates slightly further.

Technical Analysis: USD/JPY remains below 145.00

USD/JPY trades around 144.80 on Friday. Daily chart analysis indicates that the pair is positioned above the downtrend line, which points to a weakening bearish bias. Nonetheless, the 14-day Relative Strength Index (RSI) remains above 30, signaling a confirmation of the bearish trend.

On the downside, the USD/JPY pair could test the immediate downtrend line around the level of 144.50. A break below this level could lead the pair to navigate the area around the seven-month low of 141.69, recorded on August 5, followed by the next throwback support at 140.25.

Regarding resistance, the USD/JPY pair may test the immediate barrier at the nine-day Exponential Moving Average (EMA) around 145.15. A move above this level could open the door for the pair to approach the resistance area near 154.50.

Source: FXSTREET

Trading activity was notably subdued in the final Asian session of the week and August, but with a busy economic calendar ahead, volatility could pick up soon. Euro remains the weakest performer of the week, as the broad slowdown in inflation, reflected in data from Germany, Spain, Belgium, and Ireland, points towards another ECB rate cut in September. This trend is expected to be further confirmed by today’s Eurozone CPI flash report.

Currently, economists are still anticipating that ECB will continue to cut interest rates at a quarterly pace, with reductions in September and December. However, the faster-than-expected decline in inflation is raising the possibility of a more aggressive easing path by ECB. If Germany’s economy deteriorates further into recession and the temporary boost from the Olympics fades quickly in France, ECB may be compelled to act more forcefully.

Meanwhile, Dollar is attempting to recover this week, but it is struggling to find clear momentum, especially against commodity currencies. Yesterday’s data showed an upward revision of US Q2 GDP to a 3% annualized rate, easing some recession fears. However, Dollar’s gains have been capped by resilient risk sentiment, highlighted by DOW reaching another record high. Investors are now focused on today’s release of the PCE core price index, Fed’s preferred inflation gauge, which could offer more insights into the pace of the anticipated easing cycle beginning in September.

For the week overall, New Zealand Dollar is the strongest performer, followed by Canadian Dollar and Swiss Franc. British Pound, the second worst, is trailing just ahead of Euro, while Yen is also on the weaker side. Dollar and Australian Dollar are positioned in the middle of the performance chart.

Technically, USD/JPY’s decline from 149.35 remains alive despite weak downside momentum. Break of 143.43 will bring deeper fall to retest 141.67 low. Further break there will resume whole fall from 161.94. Nevertheless, break of 146.47 minor resistance will bring stronger rebound towards 149.35 resistance, with prospect of resuming the rise from 141.67 low. The next significant move could depend on the market’s reaction to today’s US PCE data, particularly its impact on treasury yields.

SNB’s Jordan: Strong Franc and weak European demand squeeze Swiss industry

SNB Chairman Thomas Jordan, who is set to step down at the end of September, highlighted the challenges facing Swiss industry due to the recent strength of the Swiss Franc and weak demand in Europe. Speaking at an event overnight, Jordan emphasized the difficulties these factors pose for Swiss industrial goods, particularly given that Germany and Europe are the primary markets for the country’s industry.

“Germany and Europe are the main markets for industry. If the growth is weak there, this automatically affects demand for our industrial goods,” Jordan stated. He also acknowledged that the strong exchange rate adds further pressure, noting, “The exchange rate … does not make the situation easier. It makes it difficult for the industry.”

Jordan reaffirmed SNB’s commitment to maintaining price stability, defined as an inflation rate of 0-2%, which he described as a “crucial precondition for prosperity.” He reiterated that interest rates remain SNB’s main tool for achieving this stability, though interventions in currency markets are also on the table if needed.

Looking ahead, markets are currently pricing in a 70% chance of a 25bps rate cut by SNB at their next meeting on September 26, with a 30% probability of a more aggressive 50bps cut.

ECB’s Nagel warns against cutting rates too quickly

Bundesbank President Joachim Nagel delivered a strong message overnight, cautioning that a timely return to price stability cannot be taken for granted.” He emphasized that ECB must tread carefully and “must not lower policy rates too quickly,”

“We are not there yet. While our 2% target is in sight, we have not reached it,” he added.

Nagel highlighted concerns that inflation, although nearing 2% target in late summer, is likely to rebound and remain above target well into 2025 due to persistent increases in service costs.

Addressing the differing views within ECB’s Governing Council, Nagel acknowledged the “intense” debates that typically accompany “turning points in the interest-rate cycle”.

However, he sought to dispel any notion of broader disagreement, stating, “When making their decisions, monetary policymakers are always faced with some degree of uncertainty. That is why a certain diversity of opinion among them as well as scope for their own judgment are considered features, not bugs.”

Japan’s Tokyo inflation accelerates in Aug as production and retail sales miss estimates in Jul

Japan’s Tokyo CPI data for August shows further acceleration in inflation, with core inflation (excluding food) rising to 2.4% yoy, above the expected 2.2%. CPI core has been climbing steadily every month since hitting a bottom of 1.6% yoy in March.

Core-core CPI, which excludes both food and energy, also ticked up to 1.6% from 1.5%, while headline CPI surged to 2.6% from 2.2%.

These figures are often seen as a leading indicator for nationwide trends. Some economists noted that rise in prices growth was primarily driven by the phase-out of government subsidies on utility bills and a spike in rice prices. Underlying inflation trends may moderate in the coming months as these one-time factors dissipate.

Also released today, Japan’s industrial production rose by 2.8% mom in July, slightly below the expected 3.3%. Looking ahead, manufacturers surveyed by the Ministry of Economy, Trade, and Industry anticipate 2.2% increase in output for August, followed by -3.3% contraction in September.

Retail sales growth also slowed to 2.6% yoy in July, down from 3.7% in June, and below the expected 2.9%.

Additionally, the unemployment rate rose to 2.7% from 2.5%, surpassing expectations of it remaining steady at 2.5%. The jobs-to-applicants ratio, however, edged slightly higher to 1.24.

Australia’s retail sales stagnate in Jul as spending momentum stalls

Australia’s retail sales turnover for July showed no growth on a monthly basis, falling short of the expected 0.2% mom increase. This flat result comes after consecutive 0.5% mom increases in both June and May, driven by mid-year sales events.

According to Ben Dorber, head of retail statistics at the Australian Bureau of Statistics, “After rises in the past two months boosted by mid-year sales activity, the higher level of retail turnover was maintained in July.”

However, the detailed breakdown reveals a mixed picture across industries, with most sectors either seeing declines or remaining flat. The only industry to post an increase was food retailing, which managed a modest 0.2% rise.

Looking ahead

The economic calendar is rather busy today. Eurozone CPI flash will be the main highlight in European session, while unemployment rate will also be released. Germany will publish import prices, retail sales and unemployment rate. France consumer spending, Swiss KOF economic barometer, and UK M4 money supply will be published too.

Later in the day, Canada will release monthly GDP. US will release personal income and spending, PCE inflation, and Chicago PMI.

Source: ACTIONFOREX

---The Australian Dollar holds its position after Retail Sales reported no growth in July.

---Australia’s Retail Sales stagnated month-on-month in July, against the expected 0.3% increase.

---The US Dollar received support following stronger-than-expected US GDP data for Q2.

The Australian Dollar (AUD) remains steady against the stable US Dollar (USD) following the Retail Sales report on Friday, which showed no growth month-on-month in July, falling short of the anticipated 0.3% and the previous 0.5% increase. However, stronger-than-expected US Gross Domestic Product (GDP) data for the second quarter released on Thursday has put pressure on the AUD/USD pair.

The AUD/USD pair could see further gains as July’s higher-than-expected Monthly Consumer Price Index (CPI) has bolstered expectations that the Reserve Bank of Australia (RBA) may adopt a more hawkish policy stance. Recent RBA Minutes also showed that board members agreed that a rate cut would be unlikely soon.

The US Dollar found support from better-than-expected economic data, but dovish comments from Federal Reserve officials could limit its gains. On Thursday, Atlanta Fed President Raphael Bostic suggested it might be "time to move" on rate cuts as inflation continues to cool and the unemployment rate rises more than anticipated, per Reuters.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Fed at its September meeting. Investors will be paying close attention to Friday’s release of the US Personal Consumption Expenditure (PCE) Price Index for July, seeking clues about the future direction of US interest rates.

Market Movers: Australian Dollar inches higher following Retail Sales data

The US Gross Domestic Product (GDP) grew at an annualized rate of 3.0% in the second quarter, exceeding both the expected and previous growth rate of 2.8%. Additionally, Initial Jobless Claims showed that the number of people filing for unemployment benefits fell to 231,000 for the week ending August 23, down from the previous 233,000 and slightly below the expected 232,000.

US Core Personal Consumption Expenditures (QoQ), the Federal Reserve's preferred measure of underlying inflation, increased by 2.8% in the second quarter, slightly below the market forecast of 2.9%. This marks a significant deceleration from the 3.7% growth observed in the first quarter.

Australia's Private Capital Expenditure unexpectedly declined by 2.2% in the second quarter, reversing from an upwardly revised 1.9% expansion in the previous period and falling short of market expectations for a 1.0% increase. This marks the first contraction in new capital expenditure since the third quarter of 2023.

Australia's Monthly Consumer Price Index (CPI) increased by 3.5% year-on-year in July, down from June's 3.8% but slightly above the market consensus of 3.4%. Despite the slight decrease, this marks the lowest CPI figure since March.

San Francisco Federal Reserve President Mary Daly stated on Monday in an interview with Bloomberg TV that "the time is upon us" to begin cutting interest rates, likely starting with a quarter-percentage point reduction. Daly suggested that if inflation continues to slow gradually and the labor market maintains a "steady, sustainable" pace of job growth, it would be reasonable to "adjust policy at the regular, normal cadence."

FOMC Minutes for July’s policy meeting indicated that most Fed officials agreed last month that they would likely cut their benchmark interest rate at the upcoming meeting in September as long as inflation continued to cool.

On Tuesday, the RBA Minutes suggested that the board members had considered a rate hike earlier this month before ultimately deciding that maintaining current rates would better balance the risks. Additionally, RBA members agreed that a rate cut is unlikely soon.

Technical Analysis: Australian Dollar holds position near 0.6800

The Australian Dollar trades around 0.6790 on Friday. Analyzing the daily chart, the AUD/USD pair appears to be testing the lower boundary of its ascending channel, indicating a potential reinforcement of the bullish bias. However, the 14-day Relative Strength Index (RSI) remains just below the 70 mark, which continues to support the ongoing bullish trend.

Regarding resistance, the AUD/USD pair is testing the immediate barrier at the lower boundary of the ascending channel, near the seven-month high of 0.6798. A break above this level could open the path for the pair to target the region around the upper boundary of the ascending channel, near the 0.6920 level.

On the downside, the AUD/USD pair may find support near the nine-day Exponential Moving Average (EMA) at the 0.6761 level. A drop below this EMA could weaken the bullish bias and exert downward pressure, potentially leading the pair to test the throwback level at 0.6575, followed by another throwback level at 0.6470.

Source: FXSTREET

[Quick Facts]

[News Details]

[Today's Focus]

---EUR/USD trades stronger near 1.1080 in Friday’s early Asian session.  

---US GDP expanded more than expected in Q2. 

---Cooling inflation from Germany and Spain supports the case for an ECB rate cut in September. 

The EUR/USD pair recovers some lost ground around 1.1080, snapping the two-day losing streak on Friday during the early Asian session. Traders might prefer to wait on the sidelines ahead of the German July Retail Sales and the US July Personal Consumption Expenditure (PCE) Price Index.

The US Gross Domestic Product (GDP) growth rate rose at an annual rate of 3.0% in the second quarter (Q2), the Department of Commerce reported in its second estimate released on Thursday. The figure was better than the forecast of 2.8 and the initial estimate of 2.8%. 

The report suggested that the US could avoid recession and dampen the hope for a larger 50 basis-point (bp) rate cut in September by the Federal Reserve (Fed). This, in turn, provides some support to the US Dollar (USD). Financial markets are now pricing in nearly 66% of a 25 basis points (bps) rate cut in September, but the chance of a deeper rate cut stands at 34%, down from 36.5% before the US GDP data, according to the CME FedWatch Tool.

Across the pond, the Consumer Price Index (CPI) data from Germany and Spain showed that inflation looks to have cooled further in August, prompting the expectation of an interest rate cut by the European Central Bank (ECB) and undermining the Euro (EUR). ING’s global head of macroeconomics, Carsten Brzeski, said that the outcome was “great news for the ECB” and further stated that a slowing economy and cooling inflation make a  “perfect macro backdrop” for lower rates. Nonetheless, emphasized that service inflation isn't dead yet.

Source: FXSTREET