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Yen plummets as BOJ buys more bonds

Home >  Daily Market Digest >  Yen plummets as BOJ buys more bonds


Written by:
Myrsini Giannouli

21 April 2022
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Important calendar events

  • GBP: MPC Member Mann Speech, BOE Gov Bailey Speech
  • EUR: Annual Final CPI and Core CPI, Consumer Confidence, ECB President Lagarde Speech
  • USD: Philly Fed Manufacturing Index, Unemployment Claims, Fed Chair Powell Speech


This week, continued Russian hostilities against Ukraine and increased sanctions on Russia increase risk-aversion sentiment, providing support for the safe-haven dollar, with the dollar index reaching the 101 level earlier in the week. 

The dollar pulled back from its recent highs on Wednesday though, with the dollar index falling to 100.2 from over 101 earlier in the week. The dollar had been overbought in the past few weeks, boosted by hawkish Fed rhetoric and from the war in Ukraine. Wednesday’s retreat was a correction to more realistic figures. Yields also withdrew across the US treasury curve, with the US 10-year treasury note falling from 3% to approximately 2.8% on Wednesday.

Inflation remains one of the biggest problems for the US economy, with CPI data last week showing that headline inflation in the US rose to 8.5%, its highest rate since 1981. Producer Price data jumped by 11.2% from last year’s data, marking the biggest increase on record in over a decade. Soaring inflation rates in the US have increased expectations of a high rise in the Fed’s benchmark interest rate, buoying the dollar.

Over the past couple of weeks, Fed rhetoric has been one of the primary drivers of USD price, as the Fed signals a faster pace of policy tightening in the US. Markets are beginning to price in a steep rate hike of 50 base points at the Fed’s next policy meeting in May. Markets have been pricing in a total of over 225 base points of additional interest rate hikes this year, boosting the dollar.

This week, Fed rhetoric continued raising expectations of a steep rate hike, with FOMC member Evans commenting that he sees benchmark interest rates rising as high as 2.25%-2.5% by the end of the year. This implies that the US Central Bank would perform three more rate hikes of an average of 50 base points this year. Fed member James Bullard, who is a known advocate of a tighter monetary policy, in his speech on Monday, didn’t rule out even a 75 base point rate hike and stressed US inflation is ‘far too high’. He stated that he would even support a 3.5% interest rate rise by the end of the year, although he doesn’t expect that such a dramatic increase would be needed.

Minutes of the latest Fed meeting indicated that several Fed officials were in favor of a rate hike of 50 base points, increasing the chances of a 50 bp increase in the Fed’s benchmark interest rate in May. FOMC minutes also signaled that the US Central Bank would reduce its bond holdings by as much as $95 billion per month. 

Several important financial, inflation and economic indicators are scheduled to be released on Thursday for the dollar, including Philly Fed Manufacturing Index and Unemployment Claims.

In addition, Fed Chair Powell is due to deliver a speech at the Volcker Alliance and Penn Institute for Urban Research Special Briefing on Thursday, which may cause volatility for the dollar.

The IMF is holding one of its bi-annual meetings this week, the IMF Spring 2022 meeting, where global economic conditions and policy shifts will be discussed at length. Fed Chair Jerome Powell is due to deliver a speech at the event on Thursday and investors will focus on his speech for hints into the Fed’s strategy in the coming months.



The Euro climbed on Wednesday, taking advantage of a weakening dollar, with the EUR/USD reaching 1.086. The Euro fell sharply last week, plummeting below the 1.080 level support, following the release of a dovish ECB statement. The outlook for the pair is bearish, and the EUR/USD is currently testing the 1.080 level support. If the currency pair goes up, it may encounter resistance at 1.118, while if it declines, support may be found at the 1.080 level and further down near 1.063. 

German PPI data released on Wednesday, which is a key indicator of consumer inflation, showed that prices in the Eurozone’s leading economy continued to rise. Soaring inflation rates in the EU increase the chances of an eventual shift towards a more hawkish policy. On Wednesday, ECB member Martins Kazaks hinted at a possible rate hike at the ECB’s monetary policy meeting in July, boosting the Euro.

In its monetary policy meeting last week, the ECB announced its main refinancing rate, which remained unchanged as expected. Investors’ expectations of a shift to a more hawkish policy were dashed after the Bank’s meeting, as the ECB showed no signs of considering a rate hike shortly. Following the conclusion of the meeting, the ECB issued a statement, which was less hawkish than expected, putting pressure on the Euro. ECB President Christine Lagarde stated that Eurozone inflation is expected to rise in the following months, while economic growth is expected to stall. Many investors had anticipated a more hawkish statement, as the last ECB meeting pointed to a more aggressive policy to tackle soaring inflation rates.

 The minutes of the previous ECB meeting indicated that many of the Central Bank’s members had expressed concern about the high inflation levels in the EU and were in favor of taking immediate steps towards monetary policy normalization. The ECB however, is hesitant to raise its interest rates, as the Eurozone economy is still struggling to recover from the effects of the pandemic. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.

The ECB has been pursuing a more cautious fiscal policy than other major Central Banks and does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.

Several important indicators are scheduled to be released for the Eurozone on Thursday, including Annual Final CPI and Core CPI, and Consumer Confidence. The CPI data are key inflation indicators and may impact the ECB’s monetary policy. In addition, ECB President Christine Lagarde is due to deliver a speech on Thursday, which may cause volatility in the currency, as investors will scan Lagarde’s speech for hints into the ECB’s future policy direction. 

EURUSD 1hr chart



The sterling rebounded on Wednesday, after suffering losses for four consecutive days. The GBP/USD rate rose to 1.306 on Wednesday, as the dollar withdrew. If the GBP/USD rate goes up, it may encounter resistance at the 1.331 level and further up near the 1.341 level, while if it declines, further support may be found near the 1.267 level. 

The pound has been declining this week, weighed down by the heavy political climate in the UK. British PM Boris Johnson is still dealing with the aftermath of the ‘party gate’ scandal and the resulting political uncertainty is affecting the currency. On Thursday, members of the British parliament are due to vote on whether Boris Johnson should be referred to parliament’s privileges committee for an inquiry into breaches of lockdown rules. Given the Conservative party’s majority in parliament though, the voting is likely to be in the British PM’s favor. 

Key inflation indicators released last week showed that inflation rates in the UK are rising, with headline inflation reaching 7%. UK inflation has hit a 30-year high and is expected to rise further in the coming months, with a peak rate close to 9% in Q4. Soaring inflation rates in the UK increase market expectations that the BOE will raise its benchmark interest again in the second quarter of 2022, after already lifting the Bank Rate from 0.1% to 0.75% in the past few months.

The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Rising commodity prices and import costs in the UK are driving inflation rates higher and may induce the BOE to adopt a tighter monetary policy to tame inflation. A more hawkish fiscal policy and consecutive rate hikes though, may stifle the country’s economy and are forcing the BOE to perform a balancing act between bringing inflation under control and allowing for economic growth.

The sterling has been losing ground against the dollar due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, there are signs that its stance may soften in the coming months, weighed down by a fragile economy. In contrast, the increasingly hawkish Fed rhetoric is boosting the dollar against the pound.

BOE Governor Andrew Bailey has stressed the importance of delivering a clear message to the public regarding the BOE’s future policy. He has stated that the joint effects of COVID and the war in Ukraine on the global economy would take some time to manifest fully and, in the meantime, the BOE would need to remain cautious. Bailey has also warned that the energy crisis in the UK was going to be ‘historic’, displaying a relatively dovish stance these past couple of weeks, especially compared to the more hawkish Fed rhetoric. 

MPC Member Mann and BOE Governor Andrew Bailey are due to deliver speeches on Thursday, which may have a considerable impact on the currency, as they may provide insight into the BOE’s future policy.

GBPUSD 1hr chart



The USD/JPY has been gaining strength these past few weeks, pushing past the resistance level of the 2015 high at 125.8, as the dollar gained strength. Early on Wednesday, USD/JPY climbed to 129.4, benefiting from a weakening yen, but withdrew to 127.4 later in the day, as the dollar slid. If the USD/JPY declines, support might be found near the 121.3 level and further down near the 118 level. 

The safe-haven dollar is boosted by continuing Russian hostilities against Ukraine. The Yen is also considered a safe-haven currency but has been underperforming, despite an increased risk-aversion sentiment, and many investors have been doubting its safe-haven status.

On Wednesday, the BOJ further supported its loose monetary policy by offering to buy an unlimited amount of bonds. The BOJ reiterated its stance of maintaining yield curve control, with the benchmark 10-year Japanese government bond yielding below 0.25%. Economic data released on Wednesday for Japan were mostly lower than expected and showed that the economy in Japan is sluggish, putting pressure on the Yen.

The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy. Last week, the Yen has been pushed down by the persistently dovish stance of the BOJ. Bank of Japan officials acknowledge the impact on the Japanese economy from increased import costs due to the weak yen but persist in following an ultra-easy monetary policy to support the struggling economy. While other countries are moving towards quantitative tightening to return to pre-pandemic fiscal policies, Japan continues to pour money into the economy.

The Bank of Japan has maintained its negative interest rate from -0.10%, while other Central Banks are moving towards a policy normalization after the pandemic and are raising their benchmark interest rates. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.

Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates around the same time, largely due to the effect of the increase in oil prices. Japan is a net energy importer and the current energy crisis is damaging the country’s terms of trade and overall economic health. The rising cost of oil is causing goods prices to rise in Japan, with oil imports accounting for 80% of the country’s oil consumption. 

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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