BoJ Stands Pat, GBP-Trades Await the UK Inflation Data


The US dollar traded higher against all but two of the other G10 currencies on Monday and during the Asian session Tuesday. It gained the most versus NZD, JPY, and GBP in that order, while it underperformed versus NOK and CAD.


Today, during the Asian session, the BoJ decided on its monetary policy, and as was broadly expected, it kept all its policy tools untouched, and upgraded its economic projections. However, although officials revised up their inflation forecasts, they said that they expect inflation to stay below their 2% target in the coming years, and added that they will maintain ultra-loose monetary policy even as their global counterparts have already started exiting covid-related policies. This means that the yen may have a disadvantage due to monetary policy divergencies between the BoJ and other major central banks, and may come under renewed selling interest soon. Something like that could help Japan’s equity market to rebound as well. However, we don’t believe that the upside trajectory will be a path full of rose pedals. After all, both the yen and Japanese equities are sensitive to developments surrounding the Fed’s future plans as well. Let’s not forget that the US is the world’s largest economy and the US dollar the world’s reserve currency. Anything suggesting that the Fed may proceed more aggressive than currently thought could hurt the broader market sentiment, resulting in a pullback in global equities, and a rebound in the yen. With the US dollar expected to strengthen as well in such case, we believe that USD/JPY may be a better choice for exploiting an uptrend, rather than EUR/JPY, as the ECB is more likely to refrain from hiking interest rates this year.


The Nikkei 225 cash index traded lower during the Asian session today, after it hit resistance slightly below the 28800 barrier, marked by the high of January 12th. However, despite the slide, in the bigger picture, the index is trading above an upside support line drawn from the low of November 30th. In our view, this keeps the door for a potential rebound wide open.


A few hours later, we got the UK employment report for November. The unemployment rate ticked down to 4.1% from 4.2%, but the net change in employment showed that the economy added less jobs than expected in the three months to November, than in the three months to October. Average weekly earnings, both including and excluding bonuses, slowed as expected. Although this could suggest that inflation may start easing in the months to come, we don’t expect market participants to change their bets around the BoE’s policy plans. The reason is that tomorrow, during the early morning again, we get the UK CPIs for December, which are more recent data, and the forecasts suggest that headline inflation may have continued to accelerate in the last month of 2021. This could add more credence to market participants’ view that the BoE will hit the hike button again at its upcoming gathering, and may bring the pound under renewed buying interest.


EUR/GBP turned down today, after hitting resistance slightly below the 0.8370 zone, marked by the peaks of January 5th and 6th, as well as by the inside swing low of December 31st. Overall, the pair has been oscillating between that barrier and the support of 0.8325 since January 4th, and thus, we will consider the short-term outlook to be neutral for now.


From Germany, we get the ZEW survey for January, with the current conditions index expected to have ticked down to -7.5 from -7.4. However, the economic sentiment one is anticipated to have increased to 32.7 from 26.8. This means that analysts see improvement for Eurozone’s growth engine in the next six months, and thus, the euro may receive a small boost at the time of the release. However, we don’t expect a huge reaction and the reason is that such numbers are unlikely to prompt participants to massively add to bets over a rate hike by the ECB this year. Remember that last week, ECB Chief Economist Philip Lane said that they do not see Eurozone inflation above 2% in the medium term, despite rising to 5% in December, which means that they are sticking to their view of no hikes this year.



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