Forex Signals Brief December 19: BOJ Keeps Interest Rates Unchanged
Last week, the focus was primarily on the Fed, as markets expected them to hint at a rate reduction. They did indeed turn dovish, and Chair Jerome Powell announced that the rate decrease would take place on Wednesday evening, pushing the USD down. However, at the end of the week, we saw a turnaround in the USD following some excellent retail sales figures for November, indicating that the US consumer is in good form.
The focus switched to the Swiss National Bank, the Bank of England, and the European Central Bank on Thursday.They all held interest rates on hold, but it’s safe to believe that the choices were leaning more toward the hawkish side because they didn’t reference rate reduction like the FED did the day before, which boosted the GBP, EUR, and CHF.
The BOE retained interest rates at 5.25%, with the MPC rate vote yielding a 6-3 decision against predictions of a 7-2 decision, which the market saw as hawkish, despite the fact that the UK economy is in horrible health, thus the GBP has nothing to run on other than USD weakness. The ECB kept rates at 4.50%, 4.75%, and 4.00%, while the SNB kept them at 1.75%.
Today’s Market Expectations
Today started with the Bank of Japan meeting, which had a lot of expectations for a policy change built up until recently, but they were written off by Ueda. The BoJ was anticipated to retain rates at -0.10% and the YCC to aim 10-year JGBs at 0% with 1% as a reference cap. Inflation rates in Japan have slowed slightly in recent months as they head back to the 2% target. The BOJ seemed primarily concerned with wage growth because it does not anticipate sustained price increases. Wage data has lately improved, and the Bank of Japan may wish to wait a few more months before making any changes to its monetary policy.
The Canadian CPI inflation will be released in the US session and the YoY number is projected to cool off to 2.9%, down from 3.1% previously, while the monthly number is expected to be -0.2%, down from 0.1% before. Because the Bank of Canada is focused on underlying inflation indicators (common, median, and trimmed-mean), they are the data to watch. Last Friday, Governor Macklem stated that the 2% inflation objective is now within reach, reaffirming the central bank’s neutral stance. Because the major central banks’ tightening cycles have concluded, the market is now pricing in rate reduction in 2024. Strong data may reduce the amount of predicted rate reduction but not eliminate them.
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