- The Fed decision hints at an earlier tapering.
- Evergrande’s rescue by the Chinese government hits the yen.
- Slower US GDP growth forecast is likely to weaken the USD.
The US dollar looked set to stay up against the yen on Thursday, gaining 0.190, or a rise of 0.17% in 24 hours, which saw the USDJPY pair trading at 109.955 at 0720 GMT. The latest gains are largely aided by the announcement by the Federal Reserve that it intended to stop its monthly asset purchases sooner than expected. The Fed chairman, Jerome Powell, also revealed that interest rate hikes would follow promptly thereafter.
The U.S. Dollar Index, which weighs the USD against six other global major currencies, was marginally lower, going down by 0.04% to register 93.240 by 0712 GMT.
Fed decision boosts the US dollar
When the Federal Reserve delivered its policy decision on Wednesday, it did not make any announcements regarding the start of asset tapering. In September, it kept the cash rate fixed at 0-0.25 per cent, and acquisitions of assets at the existing $120 billion a month.
According to Chairman Jerome Powell, the FOMC members believe that it would be justifiable to finish tapering by the mid-2022, indicating that the Fed may need to slow the rate of asset purchases in the near future.
Powell’s remarks triggered the fall in the yield on the benchmark 10-year Treasury note by 1.7 basis points. Following the Fed’s announcement, the Japanese yen experienced its steepest decline in more than three months, losing 0.5% for the day.
The yen takes a hit as China comes through for Evergrande
The decision by the Bank of Japan to retain the interest rate at -0.1% didn’t come as a surprise, but certainly didn’t help strengthen the yen. On Wednesday, the yen suffered another setback following the Chinese developer Evergrande Group’s agreement to pay interest on bond payments with its domestic creditors. Nonetheless it remains to be seen whether the company will honor its roughly $83.5 million offshore payments due on Thursday.
In order to prevent default and to defend China’s monetary system, the Chinese Communist Party (CCP) agreed a deal to attend Evergrande’s domestic debt.
This development eroded some of the gains made by the yen, as investors’ appetite for the safe haven currency is now likely to decline.
US GDP estimates may weaken the USD
The US dollar could also take a hit, following the downward revision of US GDP growth estimates by the FOMC. The committee now expects GDP to grow by only 5.9% this year, down from a previous prediction of 7% growth. In contrast, the projected growth rate for 2023 has been raised to 3.8%.
In addition, according to FOMC members’ projections, the rate of inflation will be higher than it was previously estimated. Members’ forecasts for core inflation have increased to 3.7% for this year, up from their previous forecast of 3%.
Investor sentiment will be gauged in the coming days by the release of the US Initial Jobless Claims report and the Chicago Fed National Activity Index.
The USDJPY pair has been on an uptrend for the past 48 hours and this is likely to continue. The RSI has shot up from 41 to 52 during that period, showing a market momentum growing in favor of the US dollar.
If the bullishness continues, the pair is likely to rise to the first resistance at 110.175, beyond which it could go as high as 110.402. If the bears take control, the first support could come at 109.688 and the second one could be further down at 109.212.