Good morning,

Abe ready to unveil his bazooka

It is the yen that is front and centre throughout all markets today, a rarity on a day that will see a Fed policy announcement later in the session.

Following an announcement earlier in the week from Finance Minister Aso that the Abe government would be almost deferring to the Bank of Japan over stimulus, possibly ruling out rather outlandish plans such as helicopter money, the yen strengthened. Fears were that a 6 trillion yen stimulus package would do little for an economy wracked with low private consumption and poor demographics.

Increasing private consumption in Japan is difficult. One observer quipped yesterday that if the average Japanese person found a 10,000 yen (£72.50) note in the street they were more likely to hand it in to the nearest police station than spend it themselves. This may be a stereotype but weakness in consumption needs to be the main focus.

Difficult to make head or tail of yen

The weakness in the yen overnight has been driven by a speech from Prime Minister Abe announcing plans for more than 28 trillion yen’s worth of stimulus. How much of this is new spending is unclear with a full policy announcement expected last week.

I am unsure about what happens from the Bank of Japan in the early hours of Friday morning but I have a funny feeling, given administration comms so far, there will be a surprise.

Fed to walk an uneasy tightrope of USD strength

Tonight’s Federal Reserve meeting is unlikely to rock the boat too much given a full and wide consensus expectation that policy will not be changed. Through July the majority of US data has been strong. Indeed an economic surprise index from Citibank that charts whether data has surprised to the high-side or the low-side has risen for 18 days straight – a record.

Unfortunately the Federal Reserve will not have foresight of the July jobs numbers nor the Q2 GDP report when making its decision nor writing the accompanying statement and therefore we have to think that they will err on the side of caution. This is not an issue of course given swaps markets are only pricing in a 10% chance of a hike in rates today.

Low expectations of hikes until the end of the year (49.2% at the moment) will ensure that the FOMC maintain a disciplined message on needing to see additional economic strength, namely in labour and inflation markets, before hiking. This is in order to make sure that the USD, which is nearly back to 2 month highs this morning, does not continue on some kind of path of relentless ascent. That is the most crucial balancing act.

UK GDP to show slowing of output into Brexit vote

GBP remains in a market within which people are very happy to sell any and all rallies that it may enjoy. Yesterday’s about-turn by Martin Weale helped push GBPUSD below 1.31 and traders seem to be targeting 1.2975 as the currency pair’s next stop. It is difficult to ascertain what kind of an impact today’s Q2 GDP report will have on sterling; pre-Brexit data has lost a slight hint of importance given the Bank of England’s thirst for more present indicators.

This is only the preliminary reading of the data with only 40%-odd of surveys in from the earlier part of quarter. That being said the estimates vary wildly with economists looking for anywhere between no gain at all and an increase of 0.7%.

We will find out at 09.30

Have a great day.

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