Will the Bank of Japan adjust its YCC policy this week as core inflation slows down?

Last week (7/17-7/21), the U.S. Dollar Index rose by 1.2%, while most non-U.S. currencies experienced a decline. Among them, the New Zealand Dollar, Japanese Yen, and British Pound saw the largest declines, dropping by 3.3%, 2.2%, and 1.8% respectively.

【Source: MacroMicro Date2023/7/17-2023/7/21】

【Source: MacroMicro Date2023/1/1-2023/7/21】

1.UK inflation cools unexpectedly, dragging down the euro

On July 19th, the UK Office for National Statistics released data showing that the UK's Consumer Price Index (CPI) grew by 7.9% year-on-year in June, lower than the expected 8.2%. The core CPI increased by 6.9% year-on-year, also lower than the expected 7.1%. The market's expectations for future interest rate hikes by the Bank of England significantly declined, leading to a substantial decrease in European government bond yields.

The German-American yield spread notably decreased, which resulted in a significant decline in the euro. Last week, the euro fell by 1.0% against the US dollar.

【Source：MacroMicro ；German-US Interest Rate Differential Positively Correlated with Euro】

This week, the European Central Bank (ECB) will hold a monetary policy meeting, and it is widely anticipated that there will be a 25 basis point increase in interest rates. More attention is focused on the policy direction in September. The hints provided by ECB President Lagarde during this press conference regarding the future interest rate path of the ECB are particularly crucial.

If Lagarde makes a statement similar to "the task of combating inflation has not been entirely successful," the market will continue to anticipate the possibility of an interest rate hike in September, which would provide ongoing support for the euro. Conversely, if the remarks are dovish, the market will expect that the tightening cycle in the Eurozone is nearing its end, and the upward momentum of the euro will face obstacles.

Mitrade Analyst：

Against the backdrop of higher inflationary pressures in the Eurozone compared to the United States, the European Central Bank (ECB) is more likely than the Federal Reserve to raise interest rates again after delivering a 25 basis points hike this week, which would provide some support for the euro in the medium term.

From a technical perspective, the EUR/USD pair is retracing towards the 21-day moving average, and there is a greater probability of further downward probing this week, with the 1.1 level serving as a crucial resistance level.

【Source：TradingView】

2.Will the Bank of Japan adjust its YCC policy this week with core inflation slowing down?

On July 21, the Ministry of Internal Affairs and Communications of Japan released data indicating that Japan's CPI (Consumer Price Index) rose by 3.3% year-on-year in June, slightly higher than the previous value and the expected 3.2%. The core CPI, excluding energy and fresh food, increased by 4.2% year-on-year. Although it remains near its highest level in over 40 years, it is the first slowdown since January 2022, which aligns with market expectations.

【Source：MacroMicro 】

As inflation still significantly exceeds the central bank's target of 2%, some investors believe that the Bank of Japan may change its stance and adjust its Yield Curve Control (YCC) policy, with the most suitable opportunity being the monetary policy meeting in July.

According to a recent Bloomberg survey, 82% of economists do not expect any policy changes at this meeting, while approximately 18% believe that the Bank of Japan may adjust or cancel its control over the yield curve.

In this market speculation, it is primarily local traders who are betting on adjustments to YCC, rather than overseas participants with limited knowledge of Japan. It is anticipated that the discussion regarding whether the Bank of Japan will adjust YCC or not will continue to be traded repeatedly throughout this week.

Mitrade Analyst：

The slowdown in Japan's core inflation in June may reaffirm the Bank of Japan's commitment to maintaining its monetary stimulus policy, making it unlikely for any adjustments to the Yield Curve Control (YCC) policy this week. However, the central bank might still take temporary measures in the near term to mitigate market distortions caused by YCC.

From a technical perspective, the USD/JPY pair is currently approaching the 21-day moving average. If it manages to break through the key resistance level at 142 points early this week, there is potential for further upside with resistance seen at 145. Conversely, if it continues to hover below the 21-day moving average, the support level is at 138.