Bank of Japan maintains policy rate, raises upper band yield target

December 21, 2022

The US Dollar index dropped 0.73% daily on Tuesday, tumbling following a sudden announcement from the Bank of Japan(BoJ). Despite the Bank of Japan keeping their policy rate unchanged, the increase in the upper band limit on the yield target caused the surge of Yen and weighed on the DXY index.

US stocks oscillated between gains and losses throughout a volatile session on Tuesday, with technology shares still under pressure after last week’s hawkish central bank turn. Treasuries slumped, with the global bond market digesting the Bank of Japan’s sudden increase in its yield trading band.

FedEx Corp. and Nike Inc. reported earnings after the markets closed. FedEx posted fiscal second-quarter earnings that beat analysts’ estimates, buoyed by price increases and cost cuts that helped make up for a decline in package volume. While Nike Inc. reported another quarter of inventory buildup, its quarterly sales and gross margin exceeded Wall Street’s estimates. Shares of both firms rose postmarket. Treasuries broadly held losses, with the 10-year rate climbing to around 3.69%. Yields rose after a hawkish move from the Bank of Japan sent the yen soaring more than 4% against the dollar at one point.

The benchmark, the S&P500 ended the session with a modest gain, snapping a four-day losing streak. Seven out of eleven sectors stayed in the positive territory, and the Energy sector got the best performance among all groups, rising 1.52% daily for the day. It’s also worth noting that Consumer Discretion performed the worst among all groups, falling 1.13% on Tuesday.  The Dow Jones Industrial Average edged higher by 0.3%, the Nasdaq 100 little moved lowed 0.1%, and the MSCI World index dropped by 0.7% on Tuesday.

Main Pairs Movement

The DXY index dropped almost 0.6% during the BoJ Press Conference and further declined during the US trading hour to end below the 104 level.

The GBPUSD edged higher by 0.28% daily for the day, the positive traction mainly comes from the US Dollar pullback. The pair climbed to a daily high above the 1.2200 level when BoJ’s surprising policy adjustment, then rapidly retreated to the 1.2150 level. In the meantime, the EURUSD ended with mild growth on Tuesday, as the weak greenback provide some support.

The gold surged by 1.70% daily, benefiting from risk-aversion sentiment caused by BoJ’s surprising policy adjustment. The XAUUSD suddenly gained strong fresh transactions during UK trading sessions and stand firmly above the $1800 mark in the US trading hours.

Technical Analysis

EURUSD (4-Hour Chart)

EURUSD surged on Tuesday, trading higher to 1.0651, as the dollar sold off during the Asian trading course following the BoJ monetary policy decision. The Boj left its benchmark interest rate unchanged at -0.1% and kept the 10-year JGB yield at 0.00%, which fits the expectation. However, they allowed the 10-year JGB yield to fluctuate between -0.5% and 0.5%, compared to -0.25% and 0.25% previously and noted that they will review yield curve control operations. On Wednesday, Germany will release the GFK Consumer Confidence Survey, to be expected at -38 in January. US will publish December CB consumer Confidence, foreseen at 101 in December.

On the technical side, the 4-hour chart shows that the pair is neutral, swinging around a slightly bearish 20-day SMA, while the longer moving averages hold a bullish slope below the shorter ones. Meanwhile, technical indicators are stuck near the midline with no directional strength. However, it is worth adding that buyers continue to defend the downside as it slips below the 1.0600 thresholds.

RSI(14) for the pair sits at 50.79, as of writing. On the four-hour chart, EURUSD currently trades above its 50, 100 day SMA, but below 200 days SMA.

Resistance: 1.0650, 1.0695,  1.0785

Support: 1.0580, 1.0538,  1.0480

GBPUSD (4-Hour Chart)

The cable is recovering ground above 1.2150 in the European trading course. It extends recovery, as the US dollar loses further ground across the board. Markets remain unnerved after the surprise of the BoJ policy move, spiking up US treasury yields. On the monetary policy side, Fed remained relatively hawkish, while the BoE’s MPC was split on the extent of interest rate hikes, with two members voting to keep rates unchanged. This pushed GBPUSD sharply lower, down 1.99% on the day. The Fed’s firm hawkish stance is likely to continue to support the dollar trend, putting further downward pressure on the cable. In terms of economic data and event risks, UK’s final annualized GDP for the third quarter is due on Thursday. In addition, the release of the US core PCE data on Friday could be a catalyst for the cable’s post-market movement, as the Fed’s preferred measure indicator of inflation, the core PCE data will help confirm whether the US inflation has peaked.

Cable is holding in about the middle of the past week’s range between support at 1.2090/00 and resistance at 1.2240/50. Trend signals are mixed and weak across the shorter-term studies, suggesting more sideways-range trade in the near term. RSI(14) for the pair sits at 48.13, as of writing. On the four-hour chart, GBPUSD currently trades below its 50, 100, and 200-day SMA.

Resistance: 1.2320, 1.2600

Support: 1.2100, 1.2000, 1.1940

XAUUSD (4-Hour Chart)

Tuesday’s surprise move by the BoJ to widen the target range for the 10-year government bond yield from -0.5% to 0.5%, was seen as a sign of softening its easing stance, causing the dollar to plummet against the yen and dragging down the performance of the dollar index. The retreat in the dollar index supported a rebound in gold prices, which have now regained stability at the 1800 level.

However, the US Treasury bond yields are rallying 3.50% to 4% across the curve, with the benchmark 10-year US rates above 3.70%, at the moment. Surging US Treasury yields are acting as a big hurdle to Gold’s upswing. On the other hand, as the world’s biggest gold consumer, China. The country reported five new Covid deaths on Monday, this made markets remained unnerved.

On the technical side, the gold price surged over 1.5% from today’s opening to now, the price has broken through the last estimated resistance level of 1,820 and dropped at current today’s high of 1,821. RSI(14) for the yellow metal sits at 48.13, as of writing. On the four-hour chart, XAUUSD currently trades below its 100 and 200-day SMA but above its 50-day SMA.

Resistance: 1840

Support: 1800, 1790

Economic Data

CurrencyDataTime (GMT + 8)Forecast
GBPGDP (QoQ)15:00-0.2%
GBPGDP (YoY)15:002.4%
USDGDP (QoQ) (Q3)21:302.9%
USDInitial Jobless Claims21:30222K