Will the Bank of Japan surprise markets this week? Here is a short preview ahead of its monetary policy decision.
The new trading week starts with a holiday in the United States, as the country celebrates Martin Luther King’s day. But the trading week is full of important events, one of them being the Bank of Japan’s interest rate decision and monetary policy outlook.
The Japanese yen was one of the most volatile currencies in the first two trading weeks of the year. It appreciated against its peers, mostly on expectations that the central bank will not be indifferent to rising inflation.
Changes in inflation outlook may move the yen
Last week, the US inflation data for December came out at 7% YoY. Inflation is “exported” to its main economic partners, and so Japan is not indifferent to what happens in America.
For many years, even decades, Japan’s lack of inflation was persistent. The central bank struggled to create inflation and to bring it close to 2% but failed consistently. It even engaged in a yield curve control system to bring inflation closer to its target.
So at this week’s meeting, the risk is that the Bank of Japan will loosen its grip on the yield curve. Moreover, the wording regarding inflation risks may change.
Until now, the central bank viewed inflation risks as tilted to the downside. If it communicates that inflation risks are “balanced,” that’s a hawkish twist for the Japanese yen.
USD/JPY found strong support in the 113 area
Speaking of the yen, below there is the USD/JPY daily chart. The pair traded above 116 at the start of the new trading year before correcting.
Last Friday, the poor Retail Sales data pushed the pair towards the 113 support area, but traders decided to close their shorts ahead of the long weekend.
While above 113, the market remains bullish, so the 113 area is pivotal. A daily close below would break the higher highs and higher lows series, thus marking the end of the bullish trend.
All in all, one thing is sure. As the Bank of Japan’s decision approaches, the yen pairs will experience rising volatility.
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