Traders entered the day with full focus on the US Producer Price Index (PPI) report, as they continue to assess the Federal Reserve's (Fed) next course of action.
At its meeting last month, the Federal Open Market Committee (FOMC) chaired by Jerome Powell kept interest rates at 4.25% to 4.50%, while waiting for a clearer signal on the direction of inflation and the momentum of the job market.
The PPI data to be released today is expected to be an important input for the Fed's preferred inflation index, the Core Personal Consumer Expenditures Index (core PCE), which will be released later this month.
US Treasury Secretary Scott Bessent reignited the dovish debate when he said the Fed's benchmark interest rate should be at least 150 basis points lower than it is now.
According to him, policymakers may have already cut rates if they had received weaker job market data revisions, which came just days after the last meeting.
Bessent also hinted that the Fed could take a more dovish tone next year, especially if Powell steps down after his term as chairman ends.
Across the Pacific, attention is now focused on the Bank of Japan (BOJ). Bessent said Tokyo may have to raise rates to control worrisome inflation.
Market polls show 42% of economists expect a rate hike in October, while another third see it in January. The BOJ is currently expected to keep rates on hold at its next meeting on September 19.
The prospect of tightening policy in Japan, coupled with Washington’s inclination to weaken the US dollar, has increased the yen’s appeal in foreign exchange markets.
In Washington, the political atmosphere remains tense. President Donald Trump, who has been a vocal critic of the Fed’s cautious approach, said he might name Powell’s successor “a little early,” with three to four candidates under consideration.
On the geopolitical front, Trump warned of “very severe retaliation” against Russia if President Vladimir Putin rejects a ceasefire proposal expected to be discussed this week, following talks with European leaders yesterday.
Today's PPI data will determine the direction of US bond yields and the dollar ahead of the release of core PCE data at the end of the month.
A weak PPI reading would reinforce bets of Fed easing and thus weigh on the US dollar, while a higher-than-expected reading could revive speculation of a rate hike and reduce investor appetite for riskier assets.
At the same time, yen traders are actively positioning for a possible BOJ policy tightening, making the USD/JPY pair very sensitive to any news related to interest rates and inflation.
