Asia's Central Banks Signal Dollar's Direction, U.S. Macroeconomic Factors Awaited

Monday began with a weakening of the dollar, thanks to two powerful signals from central banks in Asia: China and Japan. The head of the Bank of Japan, Ueda, stated that conditions are gradually emerging to shift monetary policy from easing to tightening. In particular, wages are rising steadily, which is typically seen as a key driver of inflation, resistant to central bank actions, among macroeconomists. Therefore, there is a consensus that this cannot be left without a policy response. Here's how the dynamics of wages in Japan have looked over the past five years:It can be seen from the chart that the rise began in early 2021, but years of deflation forced the central bank to "double-check" several times that this was not a temporary phenomenon. Apparently, it's now time to send a confident signal to the markets. On the other hand, this appeared to be an attempt to support the significantly weakened yen, which, in principle, worked: at the time of writing this article, USDJPY had fallen by almost 1%. The reversal, by the way, occurred right near the upper boundary of the ascending channel, which suggests that market participants relying on technical analysis were involved:In turn, the Japanese government bond market also reacted optimistically to the official's speech: JGB yields jumped to 0.7% on expectations, despite the fact that the central bank effectively controls the bond market, keeping long-term rates below 0.5%.The second signal came from the People's Bank of China (PBoC), which implemented rather aggressive measures to support the yuan. On Monday, USDCNY sharply declined from 7.34 to 7.29 after the PBoC significantly lowered the reference rate, implicitly recommending banks to increase dollar sales. In addition, the PBoC warned against speculative transactions and called on market participants to maintain stability.The dollar's retreat on all fronts on Monday was clearly driven by news from Asia, but the fate of the dollar's bearish trend this week will depend on its response to its own macroeconomic factors related to the United States. Indirectly, this will go through market expectations about the Federal Reserve's policy, which could be significantly revised this week since the release of the Consumer Price Index (CPI) for August is scheduled for Wednesday. It is expected that the CPI will show an acceleration of overall monthly inflation in August to 0.6%, while core inflation is expected to remain unchanged from the previous month at 0.2%. In their recent remarks, Federal Reserve officials clearly wanted to indicate that the August inflation data could tilt the scales either toward tightening in November or toward refraining from a rate hike and announcing an indefinite pause (which is likely to be interpreted by the market as the end of tightening). If core inflation comes in below expectations, the case for a dollar reversal will receive strong confirmation.Also, this week, we will see the NFIB survey results, U.S. industrial production data, retail sales, and the Producer Price Index (PPI) on Thursday, and the University of Michigan Consumer Sentiment Index on Friday.The Federal Reserve is in its blackout period this week since the FOMC meeting is scheduled for the following week, but the recent signals clearly point to a pause in September. The market will be primarily focused on the November decision. The chances of a rate hike are quite high – 42%, obviously, there is plenty of room for a shift in market expectations: