USD/JPY One-Two Punched By The Fed And Global Growth

This was the week: Dovish Fed dominates

The Federal Reserve made a significant dovish twist. They no longer foresee a gradual increase in interest rates but pledge patience amid a global slowdown and uncertainty due to the government shutdown. The central bank took one step further and announced it might change the balance sheet reduction program.

The result was a rise in stocks and a weaker US Dollar across the board, also against the Japanese yen. There were a few additional dovish things.

End-of-month flows mitigated part of the greenback’s descent.

Trade talks between China and the US continued in Washington. While President Donald Trump and Chinese officials expressed optimism, some trade hawks in the Administration still see a long way to go. Trump and his Chinese counterpart Xi Jinping may meet later in February.

China’s Caixin Manufacturing PMI extended its falls, adding to worries about a slowing Chinese economy. Germany officially slashed growth forecasts, and Italy entered a recession. The UK Parliament instructed the government to renegotiate Brexit, and this was met with immediate rejection by the European Union. All in all, the safe-haven yen had reasons to rise.

In Japan, the Bank of Japan’s meeting minutes did not stray from the extremely loose monetary policy.

US events: ISM data and more releases to come

The US government shutdown ended, but not all data points have been released or rescheduled. The calendar may be updated with further events. The most important figure that is missing is the first estimate of Q4 2018 GDP.

Trade balance kicks off the week and will serve as input to the trade talks between the US and China. Factory orders will be of interest.

The ISM Non-Manufacturing PMI for January stands out amid concerns about the slowdown and the shutdown that was in place during most of the month. The forward-looking gauge fell from the high levels and may continue falling.

Trump will deliver his State of the Union address on Wednesday. It was postponed due to the shutdown. Markets will be looking for any new economic plans such as infrastructure spending and a new tax bill in the wide-ranging speech. Willingness to work with Democrats would also help as the government is currently open only until February 15th. A long-term solution is still awaited.

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