• Increasing speculation about another Japanese rate hike
• Markets await important US data

The yen rebounded in Asian trade on Thursday against most rivals, resuming its recovery from two-week lows against the dollar after strong Japanese growth data.

‏The data bolstered the case once again of another interest rate hike by the Bank of Japan before the year end.

On the other hand, recent US inflation data bolstered the case for a 0.5% rate cut by the Federal Reserve in September, which would tighten the rate gap with Japan. 

The Price 

The USD/JPY pair fell 0.15% today to 147.14 yen per dollar, with a session-high at 147.55.

The pair closed down 0.35% on Wednesday after a 0.25% increase on Tuesday away from two-week lows at 148.22. 

Strong Growth Data

Official data showed Japan’s GDP grew by 0.8% in the second quarter of the year, beating estimates of a 0.6% growth rate, and after a 0.5% contraction in the previous quarter. 

The growth is likely due to strong consumption, which would increase pressures on BOJ policymakers to raise interest rates for the third time this year.

US Rates

On the other hand, recent US producer and consumer prices data showed inflationary pressures are subsiding.

According to the Fedwatch tool, the odds of a 0.5% interest rate cut by the Federal Reserve rose from 49% to 65%, while the odds of a 0.25% rate cut stood at 35%. 

Rate Gap

Investors have sold the yen mercilessly for months due to the massive interest rate gap between Japan and the US. 

The rate gap created profitable opportunities, with traders borrowing cheap yen to invest in dollar assets with higher yields, the so-called Carry Trade. 

However, after the BOJ and the Fed’s latest decisions in July, the rate gap between Japan and the US shrank to 525 basis points, the smallest such gap since July 2023. 

And now investors expect the gap will shrink to 500 basis points by September as the Fed prepares a new rate cut. 

Most US stock indices advanced on Wednesday as markets assess latest inflation data and its impact on Fed policies.

Government data showed US consumer prices rose 2.9% y/y in July, slowing down from 3% in July. 

Core prices, excluding food and energy, rose 3.2%, down from 3.3% in the previous reading.

That’s the slowest reading for inflation since March 2021. 

And while markets are fully expecting a Federal Reserve rate cut in September, there’s still division about whether it’ll be a 0.25% or a 0.5% cut. 

On trading, Dow Jones rose 0.2% as of 16:11 GMT, or 92 points to 39,585 points, while S&P 500 rose 0.1%, or 6 points to 5441, as NASDAQ shed 0.1%, or 32 points to 17,155. 

• US demand weakens 
• Global demand concerns resurface as China’s economy slows down 

Global oil prices fell in American trade on Wednesday, moving away from four-week highs on profit-taking, after data showed a surprise increase in US crude stocks. 

Prices are also pressured by concerns about weakening global demand after latest data from OPEC and China.

Prices

US crude prices fell 1.1% today to $77.72 a barrel, with a session-high at $79.077. 

Brent fell 0.9% to $80.24, with a session-high at $81.38.

On Tuesday, US crude lost 1.25%, the first loss in five sessions, moving away from four-week highs at $80.13.

Brent fell 1.3%, the first loss in five sessions as well, after marking July 26 highs on the previous day at $82.35. 

US Stocks

The Energy Information Administration reported a buildup of 1.4 million barrels in US crude stocks last week, while analysts expected a drawdown of 1.9 million barrels.

It’s the first inventory build in seven weeks, and a sign of weakening demand in the US.

Global Demand

OPEC, in its latest monthly report, reduced its estimates for global demand growth by 135 thousand bpd this year, due to weaker demand from China.

The International Energy Agency also said that global demand growth in the second quarter was the slowest since late 2022, at only 720 thousand bpd. 

The IEA nonetheless maintained its estimates for global demand growth at 970 thousand bpd in 2024. 

• UK services inflation dips in July to two-year lows
• Rising prospects of BOE rate cut in September 

Sterling fell in European trade on Wednesday against a basket of main rivals, marking the first loss in six days and giving up two-week highs on profit-taking, following weak UK inflation data. 

The data showed inflationary pressures on the Bank of England are receding, which boosted the prospects of a 0.25%  BOE rate cut in September.

The Price 

The GBP/USD fell 0.4% today to $1.2817, with a session-high at $1.2869. 

The pair rose 0.8% on Tuesday, the fifth profit in a row, marking two-week highs at $1.2873 after weak US producer prices data

UK Inflation

Official UK data showed consumer prices rose 2.2% in July, below estimates of 2.3%, and up from 2% in June.

Core prices, excluding food and energy, rose 3.3%, below estimates of 3.4%, and down from 3.5% in the previous reading. 

The data bolsters the odds of a Bank of England interest rate cut in September as inflationary pressures recede. 

UK Rates

Following the data, the odds of a BOE rate cut in September rose from 36% to 47%, with markets expecting a total of 50 basis points of rate cuts this year. 

The BOJ started easing policies in August, executing the first interest rate cut since March 2020. 

Sterling Forecasts

Capital Economics’ analysts note that today’s data will likely open the door for additional UK rate cuts this year, thus dragging the pound down.