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Yen volatile as a change in BOJ leadership approaches

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Written by:
Myrsini Giannouli

01 March 2023
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Important calendar events

  • JPY: Final Manufacturing PMI
  • GBP: BRC Shop Price Index, Final Manufacturing PMI, M4 Money Supply, Mortgage Approvals, Net Lending to Individuals
  • EUR: French, German, Spanish, Italian, and EU Final Manufacturing PMI, German Preliminary CPI
  • USD: Final Manufacturing PMI, ISM Manufacturing PMI, Construction Spending, ISM Manufacturing Prices, Wards Total Vehicle Sales


The dollar dipped early on Tuesday, and the dollar index touched the 104.4 level but recovered later in the day, climbing to 104.7. US Treasury yields declined, with the US 10-year bond yield dropping to 3.94%. 

US Consumer Confidence data released on Tuesday were disappointing, showing that the consumer confidence index plummeted to 102.9, missing expectations of a rise to 108.5. Richmond Manufacturing Index also declined in February, dropping to -11 versus -5 expected, with a print below zero indicating worsening conditions.

US inflation data last week showed that price pressures in the US remain high and are not easing at the pace anticipated. Core PCE, which is the Fed’s primary inflation gauge, came in hotter than expected, rising by 0.6% in January against predictions of a 0.4% raise. 

US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. PPI data also surprised markets to the upside, rising by 0.7% in January against expectations of a 0.4% raise and a 0.2% drop in December. Recent US inflation data highlight the risk of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot.

Minutes of the latest Fed meeting indicate that FOMC members believe that there is still more work to be done to tackle inflation. Even though FOMC members were in favor of reducing the pace of rate hikes, a pause in the central bank’s tightening policy does not seem to be on the cards just yet.

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.

Preliminary GDP for the final quarter of 2022 was disappointing, showing that the US economy expanded by 2.7% against expectations of a 2.9% growth. 

Several economic activities and health indicators are scheduled to be released on Wednesday and may affect dollar prices. Primary among those, are the ISM Manufacturing PMI data, which may provide information on the economic outlook of the US. 



The Euro was volatile on Tuesday, with EUR/USD climbing to 1.064 early in the day, before paring gains and dropping back to 1.059. If the currency pair goes up, it may encounter resistance near 1.070. If the EUR/USD pair declines, it may find support at 1.053. 

Minor economic activity and health indicators released on Tuesday were mostly positive for the economic outlook of the Eurozone. Hotter-than-expected inflation data for Spain and France on Tuesday also boosted the Euro. French rose to 7.2% year-on-year in February from 7.0% in January, while Spain’s consumer prices rose 6.1% year-on-year in February against the 5.7% expected.

Final Annual CPI data released last week for the Eurozone were in line with expectations, showing that headline inflation rose slightly in January to 8.6% on an annual basis, from 8.5% in December. Core CPI, which excludes food and energy, surprised to the upside, hitting a record high of 5.3% against the 5.2% expected. Sticky price pressures in the Eurozone are likely to affect ECB policy, forcing the EU Central Bank to continue raising interest rates.

EU Economic Forecasts indicate that the EU economic outlook appears to be improving, with an upgraded growth forecast for 2023. The EC lifted their growth outlook for 2023 to 0.9%, indicating that the Eurozone will narrowly avoid entering recession and the economy is slowly expanding. Inflation expectations were also downgraded, with headline inflation now expected to fall to 5.6% in 2023. Flash EU GDP data for the final quarter of 2022 confirmed the EC’s forecast, showing that the Eurozone economy expanded by 0.1%. 

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.

Final Manufacturing PMI data are scheduled to be released on Wednesday for some of the Eurozone’s leading economies and the EU as a whole and may have some impact on the Euro.

EURUSD 1hr chart



GBP/USD exhibited high volatility on Tuesday, touching 1.214 early in the day and then retreating to 1.205. If the GBP/USD rate goes up, it may encounter resistance near 1.214, while support may be found near 1.192. 

European Commission President Ursula von der Leyen met with Prime Minister Rishi Sunak earlier in the week and managed to strike a new Brexit deal. The latest version of the Northern Ireland Protocol, known as the Windsor Framework, contains more favorable trading conditions for the UK, boosting the Sterling. 

UK headline inflation cooled at a higher pace than anticipated, dropping to 10.1% year-on-year in January from 10.5% in December. After last week’s optimistic inflation print, market odds are leaning towards a 25-bp rate hike at the BOE's next monetary policy meeting in March. Cooling inflation rates remove some of the pressure on the BOE to continue its economic tightening. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. 

BOE members continue to be divided on the central bank’s future policy direction and market expectations on the outcome of the next policy meeting fluctuate. Markets are currently pricing in a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely. 

Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

Several economic activities and health indicators are scheduled to be released on Wednesday for the UK, especially Final Manufacturing PMI data. 

GBPUSD 1hr chart



The Yen plummeted early on Tuesday but gained strength during the day, as market opinion on the incoming BOJ Governor is still fluid. USD/JPY climbed to 136.8 during the day, then dropped rapidly to 135.8. If the USD/JPY pair declines, it may find support near 134. If the pair climbs, it may find resistance at 138.2. 

The Yen has been exhibiting high volatility over the past couple of weeks as developments on the succession of the BOJ Governor are front and center in the news. Incumbent BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April. Japanese Prime Minister Fumio Kishida nominated former BOJ member Kazuo Ueda for the post of BOJ governor last week. Ueda is an academic economist, and his stance is seen as more pragmatic rather than ultra-dovish. 

Most market analysts consider that Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy, but as yet his intentions remain unclear. Ueda appeared before the Japanese government's lower house known as the Diet on Friday and again on Monday. Markets eagerly awaited his testimony for signs of a pivot in BOJ policy but as yet Ueda remains non-committal. Upcoming BOJ Governor Ueda hinted at the possibility of tweaking the central bank’s bond yield curve control in the future. However, he cautioned against sudden changes in monetary policy.

On Tuesday, incoming BOJ Deputy Governor Shinichi Uchida reinforced the notion that drastic policy changes should not be expected any time soon. Uchida defended the central bank’s monetary policy stance and stated that the BOJ must maintain monetary easing. Market expectations of a departure from ‘Abenomics’ have been disappointing, driving the Yen down.

Japanese data on Tuesday were mixed, with industrial production falling short of expectations, while retail sales showed significant improvement. Industrial production decreased by 4.6% in January versus a 2.9% drop predicted. Retail sales expanded by 6.3% in January though, against expectations of a 4.2% increase.

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. Preliminary GDP data for the final quarter of 2022 showed a minimal economic expansion of 0.2%. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

Headline inflation in Japan has gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.

Volatility in Yen price is expected this week due to developments regarding the imminent change in BOJ leadership, especially after Ueda’s highly-anticipated testimony before the Diet on Monday. Final Manufacturing PMI data on Wednesday may also affect the currency somewhat. 

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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