JPY volatility picks up after BoJ meeting

JPY: BoJ lifts growth & inflation forecasts but little change to policy guidance

The yen has been volatile after today’s BoJ’s latest policy meeting. The yen initially weakened helping to lift USD/JPY up to a high of 159.23 before dropping abruptly to a low of 157.37. It has fuelled speculation over whether Japan intervened in the FX market, although could just reflect nervousness amongst market participants over the rising risk of intervention as the pair moves closer to the 160.00-level. At today’s policy meeting the BoJ decided to leave rates on hold after resuming rate hikes at the previous meeting in December. Hajime Takata was the sole hawkish dissenter who voted to raise rates to 1.00% but was defeated by the majority. He considered that the price stability target had been more or less achieved and that, with overseas economies being in a recovery phase, risks to prices in Japan were skewed to the upside. The BoJ also released their latest Outlook for Economic Activity and Prices report. the report revealed that the BoJ has raised its forecast for economic growth and inflation reflecting in part the effects from the government’s economic measures. The median projection for real GDP growth in the current fiscal year was revised higher by 0.2 percentage points to 0.9%, and by 0.3 percentage points to 1.0% for the next fiscal year before growth drops back in FY2027 as fiscal stimulus fades. The stronger growth outlook contributed to the upward revision for the core inflation forecasts. The median forecasts for core inflation excluding fresh food and energy were raised by 0.2 percentage points to 3.0% for the current fiscal year, and by 0.2 percentage points to 2.2% for the next fiscal year.        

However, Governor Ueda refrained from providing a strong signal at today’s press conference that the BoJ was considering speeding up the pace of rate hikes in response to recent developments which has encouraged further  yen selling. The Japanese rate market still does not expect the BoJ rates again until April (currently around 19bps of hikes priced in)  or June (around 25bps of hikes priced in). Governor Ueda reiterated that the BoJ will keep raising rates if their economic outlook is realized and judges that risks to growth and inflation are generally balanced. He added that the pace of rate hikes will depend on economic conditions. He believes that the outlook hasn’t changed much since the last policy meeting in December. He did add though that hearings suggest higher wages are impacting prices more than before, and will be watching closely the April inflation data which tends to have more price changes. April price behaviour is likely to be an important factor when the BoJ mulls over whether to hike rates further. The weaker yen poses upside risks to the inflation outlook. Governor Ueda noted that the BoJ is carefully watching the impact of FX on the price trend while acknowledging that it is possible that the yen is impacting prices more which requires more attention.

Governor Ueda was also asked about the recent sharp sell-off in the JGB market. He described yields are “rising very rapidly”. He stated that the BoJ will cooperate with the government over conducting nimble bond operations, and reminded market participants that they are prepared to conduct ops to encourage stable yield formation if required. He believes that yields at the super long end of the curve have been adversely impacted by the end of fiscal year factor but acknowledged that some of recent yield moves are due to fiscal worries. Overall, the BoJ’s latest policy update has not significantly altered expectations that the current yen weakening trend is likely to continue in the run up to the snap lower house election on 8^th February. The price action supports our long EUR/JPY trade recommendation (click here). The main risk to our view would be if Japan steps in to support the yen.

DIVERGENCE BETWEEN YIELD SPREADS AND USD

Source: Bloomberg, Macrobond & MUFG GMR

GBP/USD: Fed policy expectations & UK political risks in focus

The US dollar is on track to record its first weekly decline 2026 after closing higher in the first three weeks of this year. President Trump’s latest foreign policy actions regarding Greenland have put a dampener on the US dollar’s upward momentum at the start of this year even as there was further evidence of stronger US growth yesterday, and Fed rate cut expectations continue to be scaled back. The release of the latest GDP report for Q3 revealed that the US economy expanded strongly by 4.4% in Q3 following on from growth of 3.8% in Q2. Improving cyclical momentum alongside President Trump’s attacks on the Fed’s independence have prompted market participants to push back expectations for the timing of another Fed rate cut. The next rate cut is not expected until the new Fed Chair is in place by the June FOMC meeting at the earliest. It has helped to lift short-term US yields by almost 20bps so far this month but the US dollar has failed to strengthen.

The weaker US dollar has helped to lift cable back up to the 1.3500-level. There has been some good news from the UK economy as well with the latest retail sales report revealing that stronger growth in December. At the same time, domestic political risks returned as an important driver of pound performance yesterday. The pound briefly sold off after media reports emerged that a path was clearing for Manchester Mayor Andy Burnham to become an MP ahead of the local elections in May, which he needs to do to be able to mount a leadership challenge against Prime Minister Keir Starmer. It has been confirmed that Andrew Gwynne will stand down from his Greater Manchester seat, although it still remains unclear whether Andy Burnham plans to run. At the same time, there are hurdles in place to him running and potentially winning the seat including potential opposition within the National Executive Committee and from the rising popularity of the Reform party. The price action does highlight though that the May local elections could trigger a pound sell-off if a leadership change emerges.
            

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com