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Major currencies are not moving much in Europe during trading. This is due to investors being cautious ahead of the US CPI data release later today. However, the yen is an exception to this trend and has dropped 1% against the US dollar, currently trading at 131.00. This is likely caused by speculation surrounding the upcoming BOJ policy meeting next week.
The report that preceded this one indicated that decision makers will be examining the potential drawbacks of their loose approach.
The complexity of the current situation in the bond, dollar and risk sentiment markets is increased by the timing of the report, as the inflation numbers will be released later today. However, the USD/JPY pairing will remain in the spotlight next week as traders will also have to consider BOJ risks.
It appears as if traders are leaning in the direction of the Bank of Japan (BOJ) suggesting they may be contemplating a shift in their present policy stance, almost as if it were a test of the yen.
Inspecting the Japanese bond market, it appears the issues the central bank strived to rectify in December have not improved. 10-year yields have been held at 0.50% since the conclusion of last week and the Bank of Japan has continually had to step in with unlimited bond purchasing (even at 2- and 5-year bonds) to keep the market in check.
It should be noted, however, that the Bank of Japan may not have something to give market participants or those with a positive outlook on the yen anything to cheer about when the time comes. In fact, it’s entirely possible that the central bank may fail to take further action away from its current loose monetary policy, thus disappointing those who were hoping for such a development.
Though it may be a minor setback, there have been numerous developments suggesting Japan is gradually transitioning to combat inflation. Rather than expecting an abrupt alteration from the Bank of Japan, it’s better to wait and watch as the gears begin to turn.
When looking at the pair of USD/JPY, there is an immediate technical outlook which sees support at 130.00 and resistance in the region of 134.50 to 135.00.
In order for any serious changes to take place in the currency pair, it will require some recovery time on either side.