The European Central Bank kept interest rates unchanged as widely expected on Thursday, but also delivered comments that were generally considered more dovish than expected by euro traders. Among other remarks, ECB President Mario Draghi stated that “all Governing Council members reported on the situation of their own countries. All experienced some moderation in growth or loss of momentum.” Draghi also said that “we continue to expect interest rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases." With respect to inflation, Draghi also leaned dovish, stating that Eurozone core inflation has not yet shown an upward trend and that ample monetary stimulus would still be required.
These and other comments seemed to back away from both interest rate hikes within the foreseeable future as well as any well-defined end to QE stimulus, which helped to place further pressure on an already-struggling euro. This euro pressure also helped to keep the recently strengthening US dollar supported despite a pullback in US government bond yields on Thursday.
This continued strength in the dollar, combined with overall recent weakness in the Japanese yen, has prompted a sharp breakout for USD/JPY. The yen has weakened across the board in the past month, falling against both the euro and US dollar. The yen has fallen especially quickly against the sharply rebounding dollar, boosting USD/JPY well above key previous resistance around 108.00 this past week.
On Friday in Tokyo, the Bank of Japan is slated to follow the ECB with its own policy decision and announcement. Like the ECB, the BoJ is also not expected to make any major policy changes, as is typically the case, but is scheduled to release its quarterly outlook report on growth and inflation. In the past, changes to the outlook have impacted yen movement. As it currently stands, the widening differential between Federal Reserve and BoJ monetary policy expectations has helped lead to the noted month-long surge for USD/JPY.
While the currency pair may be due for a pullback or consolidation after its steep recent run, the clear and potentially growing divergence between the Fed and BoJ with respect to interest rates could be further highlighted on Friday’s BoJ decision, which could then boost USD/JPY even higher. Provided the pair remains above the noted 108.00 level (now as support) amid Friday’s BoJ decision as well as the US GDP release, the USD/JPY bias remains bullish, with the next major upside target around the 111.00 resistance level.