BoJ keeps rates unchanged but allows fluctuation on the yield curve
During today’s monetary policy meeting, the Bank of Japan (BoJ) confirmed it will maintain its short-term policy interest rate at -0.10% “for an extended period of time”, unchanged since 29. January 2016. The BoJ also confirmed investors’ expectations by announcing a change to its yield curve strategy, allowing more policy flexibility.
Indeed, the BoJ confirmed its willingness to maintain the 10-year JGB around 0%, but confirms that it could fluctuate (upward or downward) in that range. This is good news for the banking sector, for which the flat yield curve squeezed lending profits margins previously. Since the BoJ already prevented any rise in the 10-year yield above 0% with the use of unlimited bond purchases amidst its prior curve strategy, there is no doubt that the BoJ will be facing stronger headwinds when trying to curb yield rise. The end effect should be a stronger yen.
Big moves for the EUR today ?
Today’s schedule of Eurozone economic data publications is heavy. The big question is whether this will prompt large moves in the single currency or not. According to expectations, June employment rate should continue beating historical records while inflation and 2Q GDP q/q data are estimated to remain flat. However Annualized 2Q GDP is expected to have declined (estimates: 2.20%; prior: 2.50%).
As European Commission President Jean-Claude Juncker and US President Donald Trump meeting in Washington ended on a positive note last Wednesday, we expect the EUR/USD to remain stable. However, a larger-than-expected decline in GDP growth (though already priced in following ECB meeting last Thursday) or inflation could put additional pressure on the EUR, while the opposite also applies.
Trading sideways since 21. May 2018, EUR/USD is trading within a flat trend channel between 1.18 (07/06/2018 high) and 1.1540 (29/05/2018 low). The pair is expected to head along 1.1745 in the short-term.
Fed FOMC meeting expected to remain muted on Wednesday
As already mentioned in Fed’s minutes and during Jerome Powell’s testimony to the Senate, we expect the Chairman of the Federal Reserve to maintain a positive economic outlook for the US economy. The dragging trade war concern that the US President Trump administration is triggering remains a major risk for the central bank, whose changes of sentiment could lead the USD downward. For now, Powell considers current risks for the economy to be balanced. No change in current policy rate is expected. This should not happen until next monetary policy meeting on 26. September 2018.
