Markets loose policy asymmetry and the Yen
|February's latest US core CPI figures have given the Federal Reserve reason to be cautious about early rate cuts. However, with two months remaining before June, there's still time for the data to sway the Fed's decision. Despite this, market expectations for rate cuts remain steady at around 80-90 basis points for the year, closely aligned with the Fed's projected 75 basis points cut. Consequently, there has only been a modest uptick in 10-year yields.
In other market news, the NFIB Small Business Optimism Index dipped slightly to 89.4 in February from 89.9 in January, indicating ongoing subdued sentiment among small businesses. This suggests that labour market conditions may be softening, potentially restraining service sector inflation.
Traders are operating under the assumption of a "loose-policy asymmetry," believing that the Fed is comfortable with allowing inflation to hover above target without immediate action while remaining prepared to implement multiple rate cuts by the end of the year, with minimal chance of another hike. This perception of a "Fed Put" has led to various assets reaching all-time highs, as investors feel emboldened to pursue high-risk opportunities without fear of facing higher interest rates. The Fed's apparent lack of concern about the risk of a positive wealth effect reigniting demand-side inflation further supports this sentiment.
Meanwhile, in Japan, BOJ Governor Ueda has reiterated the nation's gradual economic recovery despite some signs of weakness. This suggests that the BOJ is on track to exit its negative interest rate policy, with expectations of a rate hike as soon as the March meeting following this Friday's announcement of the outcome of the annual wage negotiation.
The Japanese yen opened at 147.60 and sold into the Fix (147.30), indicating that Tokyo FX desks expect spot and forward selling from local exporters throughout the day. With US June Fed rate cuts still affirmed and the BoJ odds leaning towards a hike next week, this directional trend aligns with stronger yen expectations.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.