Early Friday, the foreign exchange market was extremely active. Against this mixed economic backdrop, the US Dollar (USD) continued to find its footing. The Bank of Japan (BoJ) has recently moved in this direction, raising its policy rate by 25 basis points to 0.75%. Consequently, the Japanese Yen (JPY) showed remarkable strength compared to its peers. This transformative development comes amidst an unprecedented economic sea change. With these increasingly rambunctious markets, key data releases from Europe and the US will quickly overshadow big biotech news and changes investor bearish currency valuations.
The USD was able to gain slightly by 0.15%. At the same time, other major currencies such as the Euro (EUR) and British Pound (GBP) fell marginally by -0.15% and -0.01%, respectively. Even the otherwise strong JPY finished slightly down at -0.08%. The Canadian Dollar (CAD), Australian Dollar (AUD), New Zealand Dollar (NZD) and Swiss Franc (CHF) were subject to expansive effect. The percent change for each was -0.13%, -0.58%, -0.62% and +0.15%, in that order. The USD Index remained flat around the key psychological level of 98.50, a sign of a relatively strong currency amid a tumultuous financial market.
Bank of Japan’s Rate Hike and Its Impact
In a surprising and bold step, the Bank of Japan has just raised its policy rate. This important decision foreshadows a major policy change in our nation’s monetary affairs. In response, the BoJ increased its benchmark interest rate from 0.50% to 0.75%. This latest move is further indication of a new hawkish mood intended on taming inflation and stabilizing our economy. This increase comes in reaction to increased costs. It wants to make the Yen more appealing relative to other currencies.
In the aftermath of this decision, the JPY continued to build on this strength, rising further against the USD. In Friday’s early trading, the USD/JPY crossed to almost 156.00. This movement represented a gain of just over 0.3% on the day. Market watchers say this reform is likely to significantly increase investor confidence in Japan’s recovery. In the context of the forex market, it has been seen to affect capital flows too.
Additionally, this rate hike brings Japan in-step with global trends as central banks around the world have been facing challenges with rising inflation. The BoJ’s policy pivot is a testament to an increasing acceptance of economic realities that will likely shape monetary policy towards the future.
Key Economic Data Releases
As we get deeper into this trading week, some important market-moving economic data will be coming out in Europe and the U.S. This information would prove to be enormously destabilizing to global currency valuations. On Friday, Germany’s usual GfK consumer sentiment data will be released. It will publish producer inflation figures, providing further insight into the current economic environment of Europe’s largest economy.
The United States is expected to release November’s Existing Home Sales data and the final revision of the University of Michigan’s Consumer Sentiment Index for December. These reports, especially the non-farm payrolls report, are cheered economic bellwethers and consumer enthusiasm, their spectacular success can move the currency market earth underneath your feet.
Market analysts have their eyes glued to these numbers. They would provide key insights into the workings of the USD at a time of unprecedented global economic upheaval. The current home sales report is key. It shows just how reluctant Americans are to make big commitments to housing – particularly as affordability is hit hard by skyrocketing interest rates.
Currency Movements and Market Reactions
As Nicole mentioned last week, as trading opens on Friday, these currencies are all reacting very differently to their respective domestic policy shift, and to international economic indicators. Despite the current mixed signals, the USD has displayed remarkable resilience, maintaining strength amid a cocktail of half-hearted economic indicators soup and continuing trip-wire global uncertainties.
The EUR and GBP in particular are grappling with a scenario where they are economically disadvantaged and struggling to maintain parity. Both have seen slight decreases, falling by -0.15% and -0.01%, respectively. Similarly, downward pressure has been felt by the CAD, -0.13%. In the meantime, the AUD and NZD were hit harder, down -0.58% and -0.62%, respectively.
On a total return basis, the CHF has been able to post a gain of +0.15% suggesting notable niche strength in an otherwise chaotic market backdrop. Traders have been following these ups and downs with bated breath, knowing that a dime or two here and there could hint at developments on currency strength.
Throughout the day, traders will remain on full notice. We hope that they learn to pay serious closer attention to geopolitical developments and economic data releases that can affect their trading in the forex markets.