1. FX Outlook
  2. FX Monthly Report

Japan Focus

After months of speculation, the Bank of Japan (BoJ) finally concluded its era of negative interest rates, increasing borrowing costs for the first time since 2007. Although an interest rate hike typically leads to currency appreciation, the yen weakened following the monetary policy announcement. Given that the current interest rate range is set at 0.0-0.1%, one could easily argue that the monetary policy remains extremely accommodative. With investors anticipating further actions by the central bank, what is the outlook for the yen?

USDJPY vs the Dollar

Recent dollar strength pushed the yen above 150.

At the start of March, as investors awaited signals of monetary easing from the Fed, a contrasting sentiment emerged across the Pacific. In Japan, the largest wage increases in 33 years fuelled market speculation that the era of ultra-loose monetary policy might be nearing an end. Japan remained an outlier with its continued use of negative interest rates as it grappled with persistent deflationary forces driven by years of minuscule wage growth and a cultural inclination towards saving. These factors dampened both demand and price increases, even in the face of the BoJ's forceful monetary stimulus measures of negative interest rates. The large disparity in bond yields between the US and Japanese yields has put significant pressure on the yen, leading to a 7% appreciation in the USD/JPY pair since the beginning of the year.

On March 19, as anticipated, the BoJ initiated a normalization process by adjusting its borrowing rates from the prior benchmark of -0.1% to a new range of 0.0-0.1%. Additionally, Governor Kazuo Ueda declared the end of the yield curve control (YCC) policy, which was designed to regulate the yield curve by establishing a target yield for 10-year Japanese Government Bonds (JGBs), effectively capping long-term interest rates. By eliminating these controls, the BoJ has allowed market dynamics to have a more significant influence on JGB yields. However, the policy’s shift is unlikely to trigger shifts in global investment flows. Despite removing YCC, the BoJ plans to continue purchasing JGBs at a rate of about ¥6 trillion per month. This indicates that while the BoJ is adjusting some aspects of its monetary policy, it remains committed to injecting liquidity into the economy to support borrowing and spending. By maintaining significant bond purchases, the BoJ aims to keep overall interest rates low and encourage economic activity. The decision underscores the BoJ's assessment of the Japanese economy, which continues to show signs of weakness.

US vs Japan 10yr Yield

Albeit narrowing, disparity remains between the 10yr yields.

Despite the shift to positive interest rates, Governor Ueda indicated that significant increases in borrowing costs are unlikely as inflation expectations have not stabilized at the 2% target. In the final quarter of 2023, Japan's economy experienced marginal growth of just 0.1% due to subdued consumption, and the recent sharp increase in prices, initially seen as a positive shift from prolonged deflation, seems to be subsiding. The removal of energy subsidies, in effect since last February, led to a rise in headline inflation to 2.8% in February, up from 2.2% the previous month. However, the weighted median inflation rate, which reflects the middle price changes across various goods and services after being ranked and weighted by their economic significance, slowed to 1.4% in February from 1.9% in January. This deceleration suggests a moderation in the rate of price increases, hinting at a less widespread inflation across the economy, as this measure filters out the most extreme fluctuations to highlight more representative price movements. Additionally, the trimmed mean inflation rate, which removes the most extreme values from both ends of the price distribution, dropped to 2.3% in February from 2.6% in January, marking the lowest year-on-year rise since September 2022. This pattern indicates that the BoJ is likely to maintain a cautious approach to any near-term adjustments in interest rates.

US vs Japan vs China Manufacturing PMI

Factory activity in Japan has been stuck in contraction.

Major Japanese companies have awarded their employees the largest wage increase since 1991, with an average raise of 5.28%. However, it remains to be seen whether this will lead to a significant boost in consumption. The Governor has stated that the Bank will continue its supportive monetary stance until there is clear evidence that the wage increases are fuelling consumer spending, which in turn would affect prices. Although the BoJ seems to advocate for a beneficial cycle of rising wages and prices, the situation is intrinsically more complicated and may not be sustainable. The core problem lies in the dependence on monetary policy adjustments rather than on authentic economic growth to spur wage hikes and overall economic advancement. Japan faces significant structural obstacles, including an aging population, a declining birth rate, substantial public debt, and modest growth rates. These challenges diminish the likelihood of the economy receiving a significant uplift, leaving little scope for substantial interest rate hikes.

Japan vs US CPI

Inflation in the two countries has recently been hovering around the 3% level.

Following the rate increase in March, the market showed a muted response, with the yen dropping 0.8% to ¥150.33 against the dollar and the 10yr Japanese Government Bond yield decreasing to 0.725%. There's a lack of confidence among investors that wage increases this year will sufficiently drive consumption to ensure a steady economic upturn. Even if the central bank decides to raise interest further, we do not expect the yen to gain strength in the short term. The yen's pivotal moment will more likely coincide with the Federal Reserve's expected reduction in interest rates around mid-year. Our attention will remain on the Fed's decisions across the Pacific, as they could be key to the yen's future appreciation. The expected 25bps cut in the Fed's rates by June could lessen the stark yield disparity between US Treasuries and Japanese bonds, setting the stage for the yen to approach the ¥140 mark once again against the dollar.

Desk Comments


The main driver in FX continues to be the scaling back of rate cut expectations. At the start of the year, the market had 50bp of cuts fully priced in by June but has now scaled back to a 50% chance of the BOE cutting by 25bp. This is due to persistent price pressures. Service inflation and earnings continue to stoke inflation although Bailey acknowledged that inflation does not need to fall below its 2% target before policymakers back a rate cut.

The Bank of England (BoE) decided to keep the Bank Rate unchanged at 5.25% last month. The vote split indicated a continued split committee, as 6 members voted for an unchanged decision, 2 for a 25bp hike and 1 for a 25bp cut so it’s not unreasonable to expect the pivot by end of Q2.

Another concern to reaching the 2% target rate is the UK housing market showing signs of building momentum again. This is in part due to the less restrictive rate outlook as buyers are entering the market again. It was also noted that Nationwide Building Society gave support to just 8,000 borrowers via the mortgage charter through December. The overall take up has been low partly because of low unemployment and strong earnings data. The average two- and five-year mortgage deals have also been on the decline after the initial spike, and we expect prices to remain resilient after they fell just 1.4% last year.

Geopolitical risk in the middle east may also increase price pressures. A British Chambers of Commerce survey showed UK exporters are experiencing higher shipping costs because of the attacks on cargo ships in the red sea.

The flow dynamic remains the same as last month. Both GBPUSD and EURGBP remain range bound. We still favour selling EURGBP rallies due to the divergence in PMI data in the UK compared to EU. Vols are realising at the lowest levels we’ve seen in years. Not seen these levels since end of 2021. Technical levels remain the same as last month. Break of 200 week moving average and 1.2800 resistance may lead to an increase in vol and an extended move higher.


There has been substantial progress in reducing inflation in the euro area, which has been achieved without a technical recession. The stagnation in the final quarter of last year means the bloc avoided a recession as firmer growth in Italy and Spain was offset with weak data in Germany. The GDP in the region’s biggest economy declined by 0.3%.

Global Service PMIs Performance

Eurozone has been diverging from other major economies.

The economic growth divergence across the region shows the greater difficulty the ECB has to deal with than the FED and BOE. The fragmentation in the euro area’s banking system means the pivot in rates is even more difficult to ascertain. Euro area inflation numbers are released this week in Spain, Italy, France, and Germany. We expect the headline numbers to fall further, with a rise in energy costs being offset by a decline from other areas namely food and services.

We expect EUR to continue to trade in a range with a large deviation from expectations in the headline data needed to start a new directional trend. JP Morgan G7 vol indicator shows vols have declined from a high of 13.45 in 2022 to a current low of 6.6. As a result, we favour selling EUR gamma and delta vs EM to benefit from the yield differential in a low vol environment.


The US Dollar over the last month has been subdued with economic data adding some noise, but nothing more as USD strength on the back of markets scaling back rate expectations appear to have run its course.US economic data during Feb has been stronger than expected, while inflation also surprised to the upside in Feb. FOMC minutes showed most officials expressed caution against moving too quickly on rate cuts amid risks of persistent inflation. Market had a timid reaction as cautious stance was no surprise and already priced in. The USD OIS is now pricing 75 basis point cuts compared to about 135 Bp end of Jan and 165 Bp end 2023, we expect any further pull back on rates unlikely unless economic data persistently shows growth

10yr TIPS vs 10yr Breakeven vs 10yr Yield

10yr Treasury yield remains elevated as the markets await a clear sign of monetary easing.

Our view from our last report remains unchanged, we believe the currently 75basis point priced in the market likely to be minimum scenario, with the Fed likely to deliver more cuts than currently expected by the markets. First cuts are expected in June / July this year which we are currently in agreement with, but as mentioned last month the desk believe when cuts do begin, they are likely to be more aggressive then the anticipated 25 basis points, a common occurrence when you look through history, a view reinforced this month given Feds continued cautious stance.

We expect the dollar to remain in a broad range next few months and then weaken towards end of Q2 against other Majors. USD’s performance against EM will be determined on the magnitude of slowdown in the US at time monetary policy starts easing. In the short run dollar movements likely to be dictated by Equity markets and risk appetite. Recent positive risk appetite on the back of strong economic has taken equity markets to all-time highs and a reversal could see USD appreciate to the top of the current range very quickly.

Our Outlook


Technical Analysis



GBPUSD tested and failed to break the white Trend line and has continued consolidating in a small range and lacking direction. On the upside, a close above the 200-week moving average likely to lead to retest of 2023 highs at 1.3142, with a break above could see the cross target 2022 highs @ 1.3749. On the downside, a break below white trendline and 1.25 support level would likely lead to further declines to green trendline, a close below could pave the way for a move down to 1.18, with support beyond there coming at 1.1420 (61.8% fib)



EURUSD briefly tested 61.8% fib level and Red trend line but continues to trade in its recent range.  We expect the market to continue consolidating with a breakout of the 2 Red trendlines indicating next direction. On the upside, a break above Red trendline/200day Ma could see market test highs from July @ 1.1276, with resistance beyond there coming at 1.1495/1.1500. On the downside, close below the triangle could see the retest 1.05 / 1.0448(lows from Sep), with a break below likely to lead to further declines to 1.02 (61.8% Fib).




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