USD / JPY cuts losses to trade around 103.50 as focus shifts to FOMC

• USD / JPY has retraced from the month’s lows at 103.20 to trade just above 103.50.
• Progress on US fiscal stimulus is reportedly being made, but currency markets are cautious ahead of the FOMC meeting on Wednesday at 7:00 PM GMT.

He USD/JPY fell to fresh monthly lows at 103.20 in the previous trade, but has since trimmed losses amid a slight recovery in USD from lows (DXY is back at 90.20 after seeing a test of 90.00), with this slight recovery from the dollar despite softer-than-expected US retail sales figures for November as well as negative Markit PMI figures for December services.

USD / JPY trades with slight losses of around 0.1% or 10 pips on the day, in line with a broader cautious sentiment in the currency, equity and commodity markets (USD / CHF, AUD / USD and NZD / USD they are also trading virtually unchanged) on the day, as are US stocks (while crude oil is slightly lower). Despite the positive news on US fiscal stimulus (Senate Majority Leader Mitch McConnell just said “significant progress” has been made toward a deal), markets appear hesitant ahead of the FOMC monetary policy announcement on Wednesday at 19:00 GMT.

USD / JPY firmly focused on key market issues

USD / JPY price action has largely ignored a recent data dump from both Japan and the US, the pair is apparently much more focused on alternative market issues such as the US fiscal stimulus talks. And the FOMC’s monetary policy announcement on Wednesday that comes later in the day.

Regarding the first; A source familiar with the status of US Congressional negotiations regarding additional Covid-19 assistance has suggested that Democrats and Republicans are “closing in” on a $ 900 billion bill that would include a new one. round of stimulus checks. Additionally, the bill will include extended unemployment benefits as well as “other avenues” of assistance to state and local governments (which has been a key demand from Democrats). Sources say the bill is unlikely to include corporate responsibility provisions (a key Republican lawsuit). Meanwhile, Senate Republican Majority Leader Mitch McConnell said recently that Congressional leaders have made great strides in working toward a Covid-19 relief deal.

Regarding the latter; Markets appear hesitant ahead of Wednesday’s FOMC meeting, where the bank is expected to control the interest rate, but may provide some guidance on the duration of its asset purchase program, or even modify the composition of this program. However, analysts point out that since Congress appears to be on the verge of reaching an agreement on fiscal aid, the bank has scope to keep fire on any policy changes and opt for patience.

Japan and US data dumps largely ignored

Both Japan and the US have released a large amount of economic data in the last 24 hours. Starting with Japan; The November trade figures released during the Asia session on Wednesday were disappointing, with the annual growth rate of exports at -4.2% (expected + 0.5%) and the annual growth rate of imports at -11.1 % (the expected was -10.5%). As a result of the larger mess in expectations for exports compared to imports, Japan’s trade surplus in November was lower than expected at JPY 366.8B (expected JPY 529.8B), below the surplus of JPY 871.7B. in October. However, preliminary manufacturing PMI figures for December were slightly less pessimistic, rising to 49.7 from 49.0 versus the expected drop to 48.9

Going forward, JPY traders will not have to worry about any more domestic economic events until the November national CPI release on Friday and the BoJ rate decision, where the bank can cite new economic fears based on the Covid-19 resurgence in Tokyo, along with December’s Tankan. Survey of Enterprises in Japan, to stretch its corporate aid package six months beyond the current March 2021 deadline.

Moving to the United States; The main data release for the note on Wednesday was retail sales figures for November at 1:30 PM GMT. Top retail sales fell 1.1% (versus expectations for a 0.3% decline) and top retail sales fell 0.9% (versus expectations for a 0.1% increase), while the control group (which gives a better indication as to consumer spending within the quarter GDP report) fell 0.5%, worse than expectations of a 0.2% increase. Control group retail sales have now been negative for two months in a row; a third negative number in December will increase the risk that fourth quarter GDP growth in the US has been negative. The data showed that the US economy is suffering as a result of the increase in Covid-19 cases and associated economic restrictions.

Meanwhile, preliminary US December Markit PMI figures released at 2:45 PM GMT gave a slightly less pessimistic reading; The manufacturing PMI only fell slightly to 56.5 from 56.7 in November, less than the expected drop to 55.7. However, the services PMI was hit harder than expected, falling to 55.3 from 58.4 against expectations of a drop to 55.9.

Looking beyond Wednesday’s FOMC meeting, USD traders will have their eyes set on weekly jobless claims, building permits (November) and the Philadelphia Fed Manufacturing Index (December), all released at 13:30 GMT Thursday, as well as any post-FOMC Fedspeak.

Technical levels