European Open AU Inflation Runs Hot GBPUSD Eyes Break of June High

The normally tranquil Friday Asian session of trade was rudely interrupted this week by a surprise decision from the Bank of Japan.

The excitement started just as US markets were closing down for the day when Japan released disappointing data on household spending (-4.4% y/y vs. -2.3% expected) and Tokyo Core CPI (-0.1% vs. +0.1%) eyed. Then, about an hour before the BOJ’s official monetary policy announcement, the massive Japanese conglomerate Nikkei reported that BOJ members had discussed the prospect of negative interest rates in an effort to stimulate Japan’s moribund economy. Anyone who’s been following the central bank rumor mill over the past few years know that almost every major central bank has “discussed” negative interest rates, but that it there is a big difference between talking about it and actually making the decision to cross the proverbial 0% interest rate Rubicon.

As it turns out, that rumor actually understated the BOJ’s seriousness as Kuroda and company opted to cut interest rates to -0.1% on certain types of excess cash reserves starting February 16^th. The decision to cut interest rates was hotly-contested, winning by a narrow 5-4 vote, but nonetheless represents an historic step in the BOJ’s long-standing efforts to stimulate Japan’s economy. Logistically, the impact of the change in policy will be relatively limited, as it will “only” apply to about ¥10-30T of reserves (the vast bulk of reserves will continue to earn 0.1%), but it does send a strong signal that the BOJ will be aggressive in preventing any additional strength in the yen. The BOJ simultaneously downgraded its assessment of the economy by cutting its inflation forecasts for the coming 12 months nearly in half (from 0.8% down to 1.4%) and pushing back the timeframe for achieving its 2% inflation goal to the 2017-2018 period.

Market reaction

With most analysts anticipating no change from the BOJ, it’s no surprise that we saw a huge move in the yen overnight. USD/JPY surged nearly 300 pips from pre-BOJ levels to hit a 5-week above 121.00, and rates are holding at that level as of writing midday Friday. Just like that, the pair has rallied back into the middle of its 14-month 116.00-125.00 range.

Moving forward, the technical picture could still support further gains in USD/JPY. The MACD is now trending solidly higher and about to cross back above the “0” level, signalling a return to bullish momentum, while the RSI indicator is still not in oversold territory, despite this week’s surge. To the topside, the next levels for bulls to key in on will be the 78.6% Fibonacci retracement of the Nov-Jan drop near 122.00, the November peak at 123.75, and the top of the established range at 125.00. Meanwhile, traders may want to fade any future moves toward the bottom of the range, as the BOJ is clearly trying to draw a “line in the sand” to prevent further appreciation in the value of the yen.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

FOREX.com is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment and CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.forex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.forex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 42.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.

Delayed London Stock Exchange (LSE) Data

The London Stock Exchange (LSE) market data displayed or referenced on this website is provided on a delayed basis and is not in real time. The delay period may vary but is typically at least 15 minutes. This data is intended for information purposes only and should not be relied upon for trading, investment, or other financial decisions. We do not guarantee the completeness, reliability, or suitability of the data for any particular purpose. Users should consult real-time data sources and obtain professional advice before making any financial decisions.