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Yen steadies ahead of BOJ decision

Home >  Daily Market Digest >  Yen steadies ahead of BOJ decision


Written by:
Myrsini Giannouli

18 January 2023
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Important calendar events

  • JPY: Core Machinery Orders, BOJ Outlook Report, Monetary Policy Statement, BOJ Press Conference, BOJ Policy Rate, Revised Industrial Production
  • GDP: Annual CPI and Core CPI, PPI Input and Output, RPI, HPI, CB Leading Index
  • EUR: Italian Trade Balance, Annual Final CPI, and Core CPI
  • USD: Monthly PPI and Core PPI, Retail Sales and Core Retail Sales, Capacity Utilization Rate, Industrial Production, Business Inventories, NAHB Housing Market Index, Beige Book, TIC Long-Term Purchases


The dollar remained steady on Tuesday, with the index touching the 102.5 level. US Treasury yields declined slightly on Tuesday, with the US 10-year bond yielding approximately 3.4%. 

Economic activity indicators released on Tuesday were pessimistic regarding the state of the US economy. Empire State Manufacturing Index plummeted to -32.9 in January, against expectations of a -8.7 print and a -11.2 print in December. This is a leading indicator of economic health, and a decreasing value shows declining business sentiment.

US inflation seems to be cooling, as US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. The soft inflation print 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 that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Markets however are currently pricing in a more moderate 25-bp rate hike at the Fed’s next monetary policy meeting.

The most important fundamentals this week are the PPI inflation indicators on Wednesday. Together with last week’s CPI data, the PPI indicators will provide a more complete picture of the direction of US inflation. 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 rose to a nine-month peak against the dollar earlier this week but retreated on Tuesday. EUR/USD plummeted on Tuesday, dropping to 1.078. If the currency pair goes up, it may encounter resistance at 1.118. If the EUR/USD pair declines, it may find support at 1.048. 

Economic activity indicators released on Tuesday were positive for the EU economic outlook, providing support for the Euro. Eurozone ZEW economic sentiment and German ZEW economic sentiment both exceeded expectations. EU ZEW economic sentiment reached 16.7 in January against a -23.6 print in December. The corresponding German indicator climbed to 16.9 in January from -23.3 in December.

Increased price pressures combined with a weak economic outlook have brought stagflation in the Eurozone, a toxic mix of high inflation and stale economic growth. 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. Eurozone 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. 

Several economic activity indicators are scheduled to be released on Wednesday for the Eurozone. Key among those are annual CPI data, which will provide information on Eurozone inflation and may affect the Euro. 

EURUSD 1hr chart



The Sterling gained strength on Tuesday, supported by robust UK jobs data. GBP/USD edged higher, climbing to 1.229. If the GBP/USD rate goes up, it may encounter resistance at 1.244, while support may be found near 1.184. 

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 denotes the change in the number of people claiming unemployment rose to 19.7K in December from 16.1K in November.

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. After a year of fiscal tightening, UK headline inflation finally dropped to 10.7% in November, alleviating some of the pressure on the BOE to raise interest rates. 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. 

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 will have to assess how much tightening it can withstand to bring inflation down. 

On the data front, the most important fundamentals scheduled to be released on Wednesday for the UK are annual CPI data, which will provide a measure of the inflation levels in the UK and may cause some volatility in the Sterling price. 

GBPUSD 1hr chart



The Yen remained steady on Tuesday, ahead of Wednesday’s BOJ meeting. USD/JPY traded sideways, oscillating around the 128.3 level. 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.

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 BOJ caused a stir in markets in December, finally yielding to increased price pressures and tilting its monetary policy. In the latest monetary policy meeting, Japanese policymakers maintained the central bank’s refinancing rate at -0.10% but 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 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. 

Meanwhile, BOJ Governor Haruhiko Kuroda has been reaffirming the central bank’s commitment to its ultra-easy policy. 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 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.

The BOJ monetary policy meeting on Wednesday is expected to generate some volatility in the Yen price. The BOJ is not expected to change its interest rate yet, but even subtle signs of a pivot in the bank’s policy are likely to affect the Yen. The BOJ may start moving away from its ultra-loose monetary policy by revising Yield Curve Control measures as early as this week. Market participants will be focusing on the Monetary Policy Statement and Press Conference following the meeting for any tweaks in the BOJ’s forward guidance. 

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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