The U.S. dollar was calm on Friday as traders braced for comments from Federal Reserve Chair Jerome Powell, while Bank of Japan Governor Kazuo Ueda aimed to soothe lingering market nerves after a surprise rate hike last month.
The yen was stronger at 145.78 per dollar after data showed Japan’s core inflation accelerated for a third month in July.
The spotlight will be on the central bankers on Friday, first on BOJ Governor Ueda who is in Japan’s parliament to discuss the surprise decision to hike interest rates last month that rattled investors and sent the yen soaring.
Bouts of interventions and an interest rate hike in July tripped up investors who unwound the popular carry trade, in which traders borrowed yen to finance high-yielding assets, yanking the yen away from the 38-year lows touched last month.
The move coupled with worries of U.S. recession triggered a massive global selloff in early August, although most markets have recovered since then.
“Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being,” Ueda said in parliament.
However, Ueda said the central bank was ready to raise rates if the economy and prices move in line with its forecast.
“A few weeks ago this could have been an exciting event,” said Matt Simpson, a senior market analyst at City Index, pointing out that officials have now seemingly scaled back their hawkish narrative amid the recent market turmoil.
“I now suspect the yen has strengthened too much too soon for their liking.”
The dollar index, which measures the greenback versus six major peers, was little changed at 101.43 in early trading after rising 0.34% in the previous session. The index touched 100.92 on Wednesday, its lowest so far this year.
Fed policymakers on Thursday lined up in support of the U.S. starting interest rate cuts next month now that inflation is down from its highs and the U.S. labor market is cooling, though one signaled he is in no rush to ease policy.
Kansas City Fed Bank President Jeff Schmid, one of the U.S. central bank’s more hawkish policymakers, was the outlier among hordes of policymakers speaking on Thursday.
That sets the stage for Fed’s Powell, who is due to speak at a central bank event in Jackson Hole, Wyoming, later on Friday where traders will tune in to gauge when and by how much the Fed could lower borrowing costs.
Nomura analysts said Powell’s speech is likely to be measured and balanced, retaining optionality, and he is unlikely to sway from the easing path hinted at by the minutes of Fed’s last meeting.
Markets are now pricing in 73.5% chance of the Fed cutting rates by 25 basis points at its September meeting, the CME FedWatch tool showed. Traders are also anticipating 99 bps of easing this year.
“While a soft landing for the economy is still within sight, it is by no means guaranteed,” said Ryan Brandham, head of capital markets for North America at Validus Risk Management.
Brandham said the balance of risks is titled towards fewer, rather than more cuts.
The euro was last at $1.1119, not far from the 13-month high it touched on Wednesday, while sterling was last at $1.3099, just shy of the 13-month high it hit on Thursday.
Markets are now pricing in more rate cuts from the Federal Reserve by year-end than for the European Central Bank or Bank of England.
The Australian dollar was at $0.6709, while the New Zealand dollar was 0.1% higher at $0.61465.
