USD/JPY holds gains near 154.00 ahead of the Fed’s minutes

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The US Dollar (USD) maintains a moderately positive tone against the Japanese Yen (JPY) this week, with price action hovering at the upper range of the 153.00s.

USD/JPY retraces Tuesday's losses and returns near weekly highs in the area of 154.00.
The US Dollar trims losses in quiet markets with all eyes on the Fed's minutes.
Weak Japanese GDP data resurfaced concerns about Japan's fiscal stability and halted JPY's recovery.

The US Dollar (USD) maintains a moderately positive tone against the Japanese Yen (JPY) this week, with price action hovering at the upper range of the 153.00s. The pair, however, remains trapped within the weekly range, with resistance around 154.00 holding bulls ahead of the release of the minutes of the US Federal Reserve’s (Fed) latest meeting.

The Fed left its benchmark interest rates on hold at the 3.5-3.75% range and hinted at a steady monetary policy in the near-term. The minutes of the meeting are likely to highlight the divergences within the bank’s committee, which will be observed with particular interest, following cooler US inflation and weak US employment reports released last week.

On Tuesday, Chicago Fed President Aistan Goolsbee highlighted those divergences, stating that, if price pressures continue moderating, the bank might cut interest rates several times this year.

In Japan, the weak Q4 Gross Domestic Product (GDP) figures released on Monday have resurfaced concerns about Japan’s economic outlook, endorsing Prime Minister Sanae Takaichi’s plans for large-scale economic stimulus and lower taxes.

The International Monetary Fund (IMF) has warned about the negative fiscal consequences of cutting the consumption tax and has called for further monetary tightening by the Bank of Japan to keep inflation anchored. This scenario has eased the JPY’s bullish momentum observed last week, and is giving some oxygen to a hitherto battered US Dollar.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.