BoJ Policy Change Affects the EUR/USD

EUR/USD experienced some whipsaw price action in the Asian session as market participants digested the Bank of Japan’s unexpected policy adjustment which reverberated through markets. Initial gains were surrendered with EUR/USD back at the 1.0600 level as the European session began.

The Bank of Japan announcement overnight seemed to inject a fresh bout of liquidity with moves across the board. Markets are speculating further policy normalization by the BoJ following today’s adjustment by the Central Bank as it increased the upper limit band on the 10Y JGB to 0.5% from 0.25%.

The move has had a negative impact on the US dollar and could boost the Yen as Japanese investors are given an incentive to bring money home while increasing the Yens haven appeal.

The Euro Area has seen continued improvement in data releases of late evidence by yesterday’s upbeat German IFO survey on Business Climate and this morning’s drop in German PPI, which hit a 9-month low. It will be interesting to see if the Euro Area flash consumer confidence due later today can keep the improvement going.

This morning we heard comments from ECB policymaker Nagel who stated the Central Bank is still a long way from hitting its inflation goal reiterating that the ECB likewise needs to be persistent on rates. The improving data coupled with the ECB’s somewhat hawkish pivot last week, a case could be made for continued EUR/USD appreciation.

The US Dollar index retreated following the BoJ policy announcement helping EUR/USD edge higher. The dollar index is likely to remain key for any future moves heading into 2023. Later in the day we have US building permit data which could reignite some bullish behavior in the dollar.