Daily Forex Market Report 20-Dec-2022: Bank of Japan’s surprise policy tweak. Yen moves against USD and GBP

The Bank of Japan made some surprising comments on its yield policy following its latest interest rate decision.

While interest rates remain non-existent for the moment, continuing BoJ’s ultra-loose monetary policy in stark contrast to its global counterpart, the bank adjusted its bond yield controls to allow long-term interest rates to rise more.

10-year yield will be given the opportunity to rise by 0.5%, having been previously limited to 0.25%.

On the policy change, analysts a Deutsche Bank said: “it’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly.”

Japanese equities went sharply south on the news, while the yen soared in all major currency pairs.

USD/JPY hit a four-month low of 133.15 after dipping nearly 3% in this morning’s Asia trading window, GBP/JPY fell to a two-month low of 161.91, and EUR/JPY dipped over 400 pips to 141.26.

Moving on, Cable is caught evenly between the bears and the bulls, having remained unchanged at 1.1215 today while forming the second spinning top candlestick pattern on the daily chart.

GBP/USD pair is showing minimal volatility in Christmas run up – Source: capital.com

The pound is showing similarly low volatility against the euro, having remained essentially unchanged at 87.27p in the EUR/GBP pair, as could be expected in a sleepy week on the economic calendar.

After adding 0.25% in yesterday’s trading session, the EUR/USD pair has held strong at 1.057 so far today.

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Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.

As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.

EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.

Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.

Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.

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