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Yen soars as BOJ adjusts policy

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Written by:
Myrsini Giannouli

21 December 2022
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Important Calendar Events

  • JPY: BOJ Core CPI
  • GBP: Public Sector Net Borrowing, PPI Input, and Output, CBI Realized Sales
  • USD: Current Account, CB Consumer Confidence, Existing Home Sales, CB Leading Index


The dollar retreated on Tuesday, affected by the BOJ policy decision, and the dollar index dropped below the 104 level. Bond yields across the world jumped on the other hand, and US Treasury yields rose, with the US 10-year bond yielding almost 3.7%.

The looming global recession had bolstered the safe-haven dollar earlier in the week, but as the Yen started to reclaim its safe-haven status, the dollar became comparatively less appealing. Recession concerns rise as more major Central Banks tighten their fiscal policies. 

Last week, FOMC members voted to raise interest rates by another 50 basis points bringing the Fed’s benchmark interest rate in a range of 4.25% to 4.50%. The rate hike was in line with expectations and had already been priced in by markets. US Fed Chair Jerome Powell delivered a hawkish speech after the monetary policy meeting, pointing to further rate hikes. 

The interest of market participants is now mostly focused on what lies ahead for the Fed. Cooling price pressures may give the US Federal Reserve some leeway to scale back its interest rate increases in the following year. US economic outlook and inflation will likely determine the pace of rate hikes in 2023. 

US inflation cooled in November, with monthly CPI rising by only 0.1%, versus the 0.3% predicted. US headline inflation was 7.1% year-on-year in November, against 7.3% expected and 7.7% in October. 

Several economic activity indicators are due on Wednesday for the US, including Current Account, CB Consumer Confidence, Existing Home Sales, and CB Leading Index. Fed rhetoric will likely be one of the primary drivers of the dollar in the coming weeks.



The Euro traded sideways against the dollar on Tuesday, with the EUR/USD rate oscillating around the 1.060 level, testing the resistance near 1.061. If the EUR/USD pair declines, it may find support at 1.042 and further down near 1.029. If the currency pair goes up, it may encounter resistance at 1.061 and higher up near 1.078.

German PPI data released on Tuesday showed that inflation in Germany seems to be cooling, with PPI in November decreasing by 3.9% against expectations of a 1.7% drop. Eurozone's Current account for October also improved, while still running at a negative value, printing at -0.4B against expectations of -10.3B. Economic conditions in the EU seem to be improving slightly, providing support for the Euro. 

ECB Vice-President Luis de Guindos delivered a hawkish speech on Monday, stating that the ECB will is committed to bringing inflation down to its 2% goal and will hike interest rates further. Likewise, ECB’s Nagel reiterated on Tuesday that the Central Bank is still far off from its inflation goal and needs to be persistent in raising interest rates. 

The ECB raised interest rates by 50 bp last week, bringing the benchmark interest rate to 2.50%, which was in line with expectations. ECB President Christine Lagarde though, delivered a decisively hawkish speech, stating that interest rates need to rise significantly to combat entrenched Eurozone inflation. 

The ECB also revised its inflation forecast for 2022 to reach an average of 8.4%, which was higher than previous forecasts. Soaring EU inflation rates are forcing the ECB to hike rates aggressively to reduce price pressures. Cooling price pressures in the US on the other hand, have trimmed Fed rate hike expectations for 2023. The ECB’s hawkish shift compared to the Fed’s more dovish forward guidance is turning the tide in favor of the Euro. 

Final Eurozone inflation reached 10.1% year-on-year in November from an earlier flash estimate of 10.0%. Revised GDP for Q3 of 2022 exceeded expectations, with the Eurozone economy expanding by 0.3% versus the 0.2% predicted. The ECB however, updated its economic growth forecast by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024, and 1.8% in 2025. These are lower than previous estimates, indicating that the economic outlook in the Eurozone is poor.

EURUSD 1hr chart



The Sterling traded sideways against the dollar on Tuesday, with GBP/USD moving around the 1.215 level. If the GBP/USD rate goes up, it may encounter resistance at 1.234, while support may be found near 1.189 and further down near 1.176. 

Both the dollar and the Sterling were under pressure on Tuesday. The Sterling has been affected this week but what has been perceived as dovish forward guidance by the BOE compared to the Fed and the ECB.

BOE members voted to hike rates by 50 bps last week, bringing the BOE’s interest rate to 3.50%, its highest rate in 14 years. The rate hike was in line with expectations, however, and had been fully priced in, putting pressure on the Sterling. 

The BOE also revised its economic growth projections, with GDP expected to drop by 0.1% in Q4 2022 following a decline of 0.5% in Q3. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down.

BOE Governor Andrew Bailey delivered a surprisingly dovish speech after the meeting, expressing hope that inflation in the UK would drop, but leaving the door open for further rate hikes. There were also mixed messages from the BOE, with 6 MPC members voting for the 50-bp rate hike, two others to maintain interest at its current rate, and another member in favor of a 75-bp increase. 

UK GDP for October showed a 0.5% expansion, versus a 0.4% expected and a 0.6% contraction in September. Annual CPI dropped to 10.7% in November, after hitting a 41-year high of 11.1% in October. Cooling price pressures alleviated some of the pressure on the BOE to raise interest rates. 

Several economic activity indicators are scheduled to be released on Wednesday for the Sterling, including Public Sector Net Borrowing, PPI Input, Output and CBI Realized Sales.

GBPUSD 1hr chart



The Yen soared on Tuesday, rising sharply after the BOJ monetary policy meeting and the USD/JPY dropped to a four-month low of 130.5. If the USD/JPY pair declines, it may find support at 133.6. If the pair climbs, it may find resistance at 139.9 and further up at the psychological level of 142.2.

The BOJ caused a stir in markets on Tuesday by finally yielding to increased price pressures and tilting its monetary policy. Inflation in Japan has gone above the BOJ’s 2% target, putting pressure on businesses and households. In Tuesday’s monetary policy meeting, Japanese policymakers maintained the central bank’s refinancing rate at -0.10%, as expected. 

The BOJ however, changed its yield control target for its 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 prelude to a shift towards a more hawkish policy. Long-term, this move may allow interest rates to rise, cutting off some of its monetary stimuli. 

BOJ Governor Haruhiko Kuroda issued a press conference after the conclusion of the meeting, which had hawkish undertones, further boosting the Yen. In his speech, Kuroda stated that the BOJ aims to bring inflation back down to the bank’s 2% target. He stressed, however, that an exit from an ultra-easy policy would be premature at this time and this might be achieved only after a certain process. Kuroda is known for his persistently dovish stance and even a slight change in the BOJ’s forward guidance has driven the Yen upwards. In addition, Kuroda is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy.

Price pressures continue to rise in Japan, as annual PPI rose to 9.3% in November, versus the 8.8% predicted. BOJ CPI for October rose to 2.7% on an annual basis, mainly due to the high cost of imported energy. 

The final GDP Price Index for the third quarter of the year showed economic contraction by 0.3% on an annual basis and the final quarterly GDP for Q3 of 2022 printed at -0.2%. The Japanese economy shrank 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. 

BOJ Core CPI data are scheduled to be released on Wednesday and may cause further turbulence in Yen price in the wake of the BOJ monetary policy meeting.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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