The decline in US inflation figures, less than expected, contributed to pressure on the US dollar against the rest of the other major currencies. It negatively affected the course of tightening the US Federal Reserve's policy, which often provided the impetus for the US dollar to achieve record gains against everyone.
In the case of the USD/JPY currency pair, it fell to the support level 134.65, and collapsed from the resistance level 137.98 in the same trading session. It settled around 135.40 at the time of writing.
Future of the US Dollar
Analysts at Goldman Sachs are looking to "buy" the dollar ahead of today's Federal Reserve decision as they look to raise the US central bank's forecast for an expected peak in interest rates. Money market pricing indicates that investors are well prepared to hike the fed funds rate by 50 basis points, ensuring that it leaves expectations and updated guidance from the Fed to fuel financial market volatility.
Accordingly, Jan Hatzios, head of global investment research and chief economist at Goldman Sachs, says: “The main event at the FOMC meeting in December is likely to be an increase in the expected peak of the funds rate in 2023.” Goldman Sachs expects the average point to rise by 50 basis points to a new peak of 5-5.25%. “Fed officials were hoping that pairing a slower pace of tightening with a higher interest rate would prevent a significant easing of financial conditions,” the analyst added. This plan did not work.”
The easing in financial conditions, (the cost of money is now cheaper than it was a few weeks ago) is partly due to the weak inflation report released in November. This led investors to bet that the Fed was entering the end of the hiking cycle, allowing them to price in at a time when interest rates are flat and then lower. Goldman Sachs' Financial Conditions Index has now fallen about 100 basis points from its recent peak and their estimate of the negative impact on growth in 2023 of tightening financial conditions has diminished significantly. This leads Wall Street bank economists to worry that US economic growth may prove more resilient in early 2023, thus spurring domestic inflationary pressures. But the analyst says there is not much the Fed can do to respond to the recent easing in financial conditions without signaling another 50 basis point increase in February.
At some point in the future, economists expect to revise the FOMC statement to say that "incremental" rather than "continued" rate hikes are appropriate, but not yet. This would be an implicit confirmation that the end of the cycle is in sight.
In terms of the updated economic outlook, Goldman Sachs is looking for lower US economic growth next year, but a broadly similar outlook. The dot chart is likely to show slightly larger reductions after 2023 than the new higher peak. Accordingly, Goldman Sachs continues to expect three increases of 25 basis points in 2023 to a peak of 5-5.25%, despite the risk bias towards 50 basis points in February.
Currency Perspectives
Analysts at Goldman Sachs are looking for strength in the US dollar. Accordingly, currency strategists at Goldman Sachs are “buying” the dollar against the yen as the Federal Reserve’s decision approaches. The investment bank also maintains a bearish stance on the pound despite its recent outperformance as analysts continue to believe that the lack of support from higher real rates will eventually limit the currency's strength. Part of the justification for this situation is the expectation that the Bank of England will continue to shy away from raising interest rates to the extent needed to bring down high levels of inflation. The British Central Bank is expected to limit interest rate hikes in order to protect economic growth.
Forecasts of the US dollar against the Japanese yen today:
- The course of the exchange rate of the US dollar against the Japanese yen, USD/JPY, is downward.
- Its recent losses towards the support level 133.60 are sufficient to push the technical indicators towards oversold levels.
- We recommend thinking about buying the US dollar against the yen and moving towards it today also after decisions.
- The divergence in the future of monetary policy and economic performance is ultimately in favor of the US dollar.
On the other hand, the break of the USD/JPY psychological resistance level 140.00 will be important for the bulls to control the trend again.
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