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• 10-year JGB implied volatility has tapered downwards since the implementation of flexible YCC in October 2023, lowering the odds of disorderly movements in the JGB
• Elevated demand-pull inflation (excluding fresh food & energy) in Japan may prompt BoJ to upgrade its inflation (excluding fresh food & energy) forecasts for FY 2024 & FY 2025.
• Technical analysis has detected bearish elements in USD/JPY where JPY may start to strengthen in the short term towards 146.25 and a break below it exposes 144.55 next.

Bank of Japan (BoJ) will conclude its first monetary policy meeting for 2024 tomorrow, 23 January. In the past three months, calls from the Japanese private and public sectors and even ex-BoJ officials have urged the Japanese central bank to ditch its current -0.1% short-term interest rate in place since 2016 as such a level is irrelevant and does not reflect the current fundamentals of the Japanese economy.

Since BoJ’s prior monetary policy meeting outcome on 31 October, the central bank has taken “baby steps” to guide market participants on the ending of its short-term negative interest rate policy and kickstart normalization of its current ultra-easy monetary policy stance.

BoJ has allowed more flexibility of its Yield Curve Control Programme on the 10-year Japanese Government Bond (JGB) yields as it scrapped the prior hard-capped upper limit of 1% to make it as a reference level now where BoJ’s will “nimbly conduct its market operations” around that 1% level.

Current flexible YCC model has lowered 10-year JGB implied volatility

Fig 1: 10-year JGB implied volatility with JGB futures & USD/JPY as of 19 Jan 2024 (Source: TradingView, click to enlarge chart)

This flexibility of allowing the 10-year JGB yield more breathing space to fluctuate on the upside has enabled BoJ not to be “boxed in” when it eventually removes the YCC programme as a non-committal stance to any perceived hard-capped upper limit is likely to reduce undesirable speculative activities in the JGB futures market that is likely to trigger adverse reflexive loops into other asset classes and the real economy.

The current YCC modus operandi to deter rampant speculation activities in the JGB futures market seems to be working as the implied volatility of the 10-year JGB has dropped from a high of 7.98 before the 31 October 2023’s new YCC flexible implementation to 3.79 as of last Friday, 19 January (see Fig1).

Forward guidance will be key for tomorrow as demand-pull inflation remains elevated

Fig 2: Tokyo & Japan core-core inflation trends with Nikkei 225 as of 22 Jan 2024 (Source: TradingView, click to enlarge chart)

In the run-up to tomorrow’s BoJ monetary policy decision outcome, market participants have toned down significantly the expectations of the removal of short-term negative interest rates due to the recent Japan’s Noto earthquake that occurred at the start of the new year. Right now, expectations on BoJ’s stance to scrap short-term negative interest rates have shifted down the calendar to the next meeting in April where BoJ will also have the release of preliminary results of annual wage negotiations between unions and companies that are still ongoing till the end of March. Stable and rising wages are key criteria for Japan to enable a forceful and sustainable exit from its decade-plus of deflationary spiral according to BoJ Governor Ueda.

Even though inflation growth has eased off in December due to cost-push factors such as lower oil prices as indicated by the Tokyo and nationwide Japan CPI data, demand-pull related inflation excluding fresh food and energy in Japan has remained elevated at 3.7% y/y, a 42-year high, and above BoJ’s 2% target for the 15^th consecutive month. Services inflation in Japan also grew by 2.3%y/y for the second consecutive month in December, its fastest pace in three decades.

Therefore, market participants will be scrutinizing the BoJ’s monetary policy statement, its latest inflation projections in its updated quarterly outlook report as well as BoJ Ueda’s press conference for hints of “comfortability” to finally set the stage for the removal of short-term negative interest rates.

In the previous quarterly outlook released in October, BoJ upgraded its inflation forecasts (excluding fresh food & energy) to 1.9% y/y for fiscal years 2024 and 2025 from 1.7% y/y and 1.8% y/y respectively. A further potential upgrade on inflation (excluding fresh food & energy) towards 2% y/y for 2024 and 2025 suggests a potential signal to the market that the end of short-term negative interest rate is imminent and baby steps are in the pipeline for the normalization of ultra-easy monetary policy.

Watch the 149.30 key short-term resistance on USD/JPY

Fig 3: USD/JPY short-term minor trend as of 22 Jan 2024 (Source: TradingView, click to enlarge chart)

The recent 5-day rally of USD/JPY  from 12 January to 19 January 2024 intraday high of 148.81 has started to show signs of exhaustion ahead of tomorrow’s risk event (BoJ’s monetary policy decision outcome).

The hourly RSI momentum indicator has flashed out a bearish divergence signal at its overbought region while its daily price actions as of the close of last Friday, 19 January have formed a bearish daily “Spinning Top” candlestick pattern after prior three consecutive appearances of bullish candlesticks right below a key short-term pivotal resistance at 149.30.

The intermediate support zone will be at 147.30/146.25 and a break below 146.25 may trigger a potential impulsive down move sequence to expose the next support at 144.55 (also 50-day and 200-day moving averages) in the first step.

On the other hand, a clearance above 149.30 invalidates the bearish tone to see the next intermediate resistance coming in at 150.20/70.

Daily Pivots: (S1) 187.63; (P) 187.94; (R1) 188.57; More...

Intraday bias in GBP/JPY is turned neutral first with a temporary top formed at 188.89. Further rally is expected as long as 186.14 resistance turned support holds. ON the upside, break of 188.89, and sustained trading above 188.63 will confirm up trend resumption. Next target is 38.2% projection of 155.33 to 188.63 from 178.32 at 191.04.

In the bigger picture, up trend from 123.94 (2020 low) in in progress. Medium term outlook will stay bullish as long as 178.32 support holds. Next target is 195.86 long term resistance (2015 high).

Daily Pivots: (S1) 160.90; (P) 161.38; (R1) 161.95; More...

Intraday bias in EUR/JPY is turned neutral with a temporary top formed at 161.84. Some consolidations could be seen first. But even in case of deep retreat, further rally is expected as long as 158.55 resistance turned support holds. On the upside, break of 161.84 will resume whole rally from 153.15 to 161.8% projection of 153.15 to 158.55 from 155.06 at 163.79, which is close to 164.29 high.

In the bigger picture, price actions from 164.29 medium term top are seen as a correction to rise from 139.05 only. As long as 148.48 resistance turned support holds (2022 high), larger up trend from 114.42 (2020 low) is expected to resume through 164.29 at a later stage.

Daily Pivots: (S1) 0.8555; (P) 0.8574; (R1) 0.8597; More...

Intraday bias in EUR/GBP remains neutral at this point. Further decline is expected as long as 0.8619 resistance holds. On the downside, decisive break of 0.8548 will indicate that larger down trend is ready to resume through 0.8491 low. However, break of 0.8619 will dampen this bearish view and turn bias back to the upside for stronger rebound.

In the bigger picture, fall from 0.8764 is seen as another leg in the whole down trend from 0.9267 (2022 high). Outlook will stay bearish as long as 0.8713 resistance holds. Break of 0.8491 will target 61.8% projection of 0.8977 to 0.8491 from 0.8764 at 0.8464.

Daily Pivots: (S1) 1.6477; (P) 1.6523; (R1) 1.6564; More...

Intraday bias in EUR/AUD remains neutral for the moment, as consolidation from 1.6671 is extending. Further rise is expected as long as 1.6398 support holds. Corrective fall from 1.7062 should have completed with three waves down to 1.6127 already. Above 1.6671 will target 1.6844 resistance to confirm this bullish case.

In the bigger picture, fall from 1.7062 medium term top is seen as correction to the up trend from 1.4281 (2022 low). Break of 1.6844 resistance will argue that this up trend is ready to resume through 1.7062 high. In case of another fall, strong support should be seen around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound.

Daily Pivots: (S1) 0.9440; (P) 0.9456; (R1) 0.9475; More...

Intraday bias in EUR/CHF stays on the upside for the moment. Rebound from 0.9252 is seen as correcting whole down trend from 1.0095. Further rally should be seen to 38.2% retracement of 1.0095 to 0.9252 at 0.9574. On the downside, below 0.9404 minor support will turn intraday bias neutral first.

In the bigger picture, medium term outlook remains bearish as long as 0.9683 resistance holds. Current fall from 1.2004 (2018 high) is part of the multi-decade down trend. Another decline is in favor after rebound from 0.9252 completes. However, firm break of 0.9683, and sustained trading above 55 W EMA (now at 0.9659) will argue that EUR/CHF is already in a medium term rally, even as a corrective move.

Daily Pivots: (S1) 1.0877; (P) 1.0888; (R1) 1.0908; More...

Intraday bias in EUR/USD remains neutral for consolidation above 1.0843 temporary low. But further decline is expected as long as 1.0995 resistance holds. Below 1.0843 will target 1.0722 support next. Decisive break there will argue that whole rise from 1.0447 has completed, and target this low.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and below.

Daily Pivots: (S1) 1.2672; (P) 1.2694; (R1) 1.2725; More...

Intraday bias in GBP/USD stays neutral for the moment. Consolidation pattern from 1.2826 could extend further. Break of 1.2595 support will target 1.2499 support. On the upside, however, firm break of 1.2784 resistance will suggest that the consolidation pattern has completed. Further rally should then resume through 1.2826 towards 1.3141 high.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg that's in progress. Upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.

Daily Pivots: (S1) 0.8666; (P) 0.8685; (R1) 0.8700; More....

Outlook in USD/CHF remains unchanged, with focus on 38.2% retracement of 0.9243 to 0.8332 at 0.8680, which coincides 55 D EMA (now at 0.8687). Decisive break there will turn near term outlook bullish for 61.8% retracement 0.8995. Nevertheless, break of 0.8565 minor support will turn intraday bias back to the downside for retesting 0.8332 low.

In the bigger picture, while rebound from 0.8332 could be strong, there is no clear sign of medium term bottoming yet. This rebound is tentatively seen as a corrective move for now. Also, outlook will stay bearish as long as 0.9243 resistance holds. Larger down trend from 1.0146 (2022 high) should resume through 0.8332 low at a later stage.

Daily Pivots: (S1) 147.74; (P) 148.28; (R1) 148.71; More...

Intraday bias in USD/JPY remains neutral for consolidation below 148.79 temporary top. Further rally is expected as long as 145.97 resistance turned support holds. Corrective all from 151.89 should have completed at 140.25 already. Break of 148.79 will resume the rise from there for retesting 151.89/93 key resistance zone.

In the bigger picture, stronger than expected rebound from 140.25 dampened the original bearish review. Strong support from 55 W EMA (now at 141.89) is also a medium term bullish sign. Fall from 151.89 could be a correction to rise from 127.20 only. Decisive break of 151.89/93 will confirm resumption of long term up trend. This will now be the favored case as long as 140.25 support holds.