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Yen plummets after BOJ disappoints

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Written by:
Myrsini Giannouli

19 January 2023
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Important calendar events

  • JPY: Trade Balance
  • GBP: RICS House Price Balance, BOE Credit Conditions Survey
  • EUR: Current Account, ECB Monetary Policy Meeting Accounts
  • USD: Philly Fed Manufacturing Index, Unemployment Claims, Building Permits, Housing Starts


The dollar declined on Wednesday on soft US inflation data, with the dollar index dropping to 101.5, before bouncing back to 102.4. US Treasury yields declined slightly on Wednesday, with the US 10-year bond yielding approximately 3.3%. 

US Retail Sales data and other fundamentals were disappointing on Wednesday, putting pressure on the dollar. More importantly, US PPI data on Wednesday fell below expectations, driving the dollar down. Together with last week’s CPI data, the PPI indicators provide a more complete picture of the direction of US inflation. US inflation seems to be cooling, as Producer Price Index declined by 0.5% in December, versus estimates of a 0.1% drop. In addition, November’s PPI print was revised to reflect a 0.2% increase, instead of the original 0.3% to 0.2%.

US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. The soft inflation print has put pressure on the dollar, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases. 

Fed interest rate increases have been the main factor driving the US dollar and treasury yields over the past few months. At the latest monetary policy meeting the Fed raised interest rates by 50 basis points, bringing the benchmark interest rate to a target range of 4.25% to 4.50%. 

US economic outlook and inflation will likely determine the pace of future rate hikes. Many analysts believe that the Fed will ease its rate hikes but will continue raising interest rates at a slower pace until the benchmark interest rate reaches at least 5.0%. This means there are likely still a couple of rate hikes up ahead, which may support the dollar. Markets however are currently pricing in a more moderate 25-bp rate hike at the Fed’s next monetary policy meeting.

US Philly Fed Manufacturing Index, Unemployment Claims, Building Permits, and Housing Starts are scheduled to be released on Thursday and may cause volatility in dollar prices. As interest in the Fed’s future policy direction mounts, the dollar will also be especially sensitive to FOMC members’ speeches this week.



The Euro hit a nine-month peak against the dollar on Wednesday after the release of softer-than-expected US inflation data. The EUR/USD touched 1.088 as the dollar plummeted but pared gains later in the day. If the currency pair goes up, it may encounter resistance at 1.089 and higher up near 1.118. If the EUR/USD pair declines, it may find support at 1.048. 

The EUR/USD pair was driven mainly by the dollar’s movement on Wednesday, exhibiting high volatility as US inflation declined more than expected. EU final inflation data released on Wednesday on the other hand tallied with the Flash estimates released at an earlier date and did not affect the Euro significantly.

Final EU headline inflation dropped to 9.2% year-on-year in December from a 10.1% print in November indicating that Eurozone inflation is cooling. This is the first drastic drop in inflation that signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise significantly to combat entrenched inflation. 

EU inflation rates are still far from the ECB’s 2% goal and are forcing the central bank to hike rates aggressively. In its latest monetary policy meeting in December, the ECB raised interest rates by 50 bp, bringing its benchmark interest rate to 2.50%. 

The question, however, is whether economic conditions in the Eurozone will allow the ECB to continue raising interest rates at a fast pace. EU economic outlook is poor, and the ECB might be forced to raise interest rates in a recessionary backdrop.

Markets are pricing in at least two more 50-bp rate hikes in February and March this year. On the other hand, market odds for the next Fed rate hike are at 25-bp, as a pivot in the Fed’s policy is expected. If this scenario comes true, it will boost the Euro against the dollar. 

Current Account, ECB Monetary Policy Meeting Accounts are scheduled to be released on Thursday for the Eurozone. In addition, ECB President Christine Lagarde is due to deliver a speech at the World Economic Forum in Davos on Thursday.

EURUSD 1hr chart



The Sterling gained strength on Wednesday, on a hot UK inflation print. GBP/USD edged higher, climbing to 1.243. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.184. 

UK headline inflation dropped to 10.5% in December from 10.7% in November, in line with expectations. Core CPI, which excludes food and energy, remained at 6.3%, against expectations of a 6.2% print. The Sterling went up after the release of the CPI data as UK inflation has become entrenched, remaining firmly above 10%.

Surging inflation has forced the BOE to adopt a more hawkish fiscal policy, bringing its interest rate to 3.50% in December, its highest rate in 14 years. In the latest monetary policy meeting in December, BOE members voted to hike rates by 50 bps. With inflation remaining above 10%, this was perceived by many analysts as the start of a pivot toward a more dovish fiscal policy, putting pressure on the Sterling. 

On Monday, BOE Governor Andrew Bailey delivered a speech that was perceived as dovish, putting pressure on the Sterling. Bailey was optimistic about British inflation this year, stating that that inflation looks set to fall markedly as energy prices decrease. He stressed, however, that labor shortages in the UK pose a threat to cooling inflation rates. 

The labor sector is ailing in the UK, but jobs data released on Tuesday were overall positive. UK monthly unemployment rate remained steady at 3.7% in November. The Average Earnings Index rose to 6.4% from the 6.2% expected, indicating that wages go up due to labor shortages. Conversely, Claimant Count Change, which denotes the change in the number of people claiming unemployment rose to 19.7K in December from 16.1K in November.

The UK’s grim economic outlook may limit policymakers’ ability to increase interest rates sufficiently to rein in inflation. The final GDP print for the third quarter of 2022 was -0.3%, indicating that the economy in the UK is shrinking. The British economy is still struggling, and policymakers must assess how much tightening it can withstand to bring inflation down. 

RICS House Price Balance and BOE Credit Conditions Survey are scheduled to be released on Thursday for the UK and may cause some volatility in the Sterling.

GBPUSD 1hr chart



The Yen was volatile on Wednesday, driven by the outcome of the BOJ meeting. USD/JPY touched 131.5 in early trading as the Yen collapsed but pared gains later in the day dropping to 128.5. If the USD/JPY pair declines, it may find support near 127.2 and further down at 114.2. If the pair climbs, it may find resistance at 138.2.

Japanese policymakers on Wednesday maintained ultra-low interest rates, keeping the central bank’s refinancing rate at -0.10% as expected. The Yen plummeted after the BOJ meeting, as markets were anticipating a pivot to a more hawkish direction. The BOJ was expected to relax its yield curve control policy further, but the central bank left all policy settings unchanged this month.

At the press conference following the BOJ meeting, BOJ Governor Haruhiko Kuroda defended the central bank's decision to keep its yield curve control policy unchanged. In addition, Kuroda vowed to conduct unlimited bond buying to maintain the bank’s yield curve control. Kuroda, however, is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy. A pivot in Japan’s monetary policy within 2023, would boost the Yen considerably. 

The BOJ caused a stir in markets in December by changing its yield control target for the 10-year government bond to between plus or minus 0.50%, from a previous 0.25%. The BOJ had set a target range around zero for government bond yields for years, and this adjustment may be the signal of a shift towards a more hawkish policy. Long-term, this move may allow interest rates to rise, cutting off some of its monetary stimuli. 

Price pressures continue to rise in Japan, as Year-on-year PPI to the end of December came in at 10.2% on Monday, exceeding expectations of a 9.5% print. In addition, BOJ CPI recently rose to 2.9%, mainly due to the high cost of imported energy. Inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households.

The final GDP Price Index for the third quarter of 2022 showed economic contraction by 0.3% on an annual basis and the Japanese economy shrank by 0.2% in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Trade Balance data are scheduled to be released on Thursday for Japan and might affect the Yen in the wake of BOJ’s decision on Wednesday.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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