Sage Investment Club

In today’s Asian trading session, the Bank of Japan announced that it kept its accommodative monetary policy unchanged, with its benchmark interest rate and 10-year government bond yield holding steady at historic lows of -0.1% and 0% respectively. The Bank also indicated that it “will not hesitate to increase easing when necessary” and that it “will be flexible in making large-scale bond purchases”, releasing a clear dovish signal to the market and reinforcing Governor Haruhiko Kuroda’s statement that “the December move was a technical change”. The Bank of Japan’s economic forecasts are also very positive.

In terms of economic forecasts, the Bank of Japan lowered its median GDP growth forecast for this year and next to 1.7% (from 1.9% previously) and 1.1% (from 1.5% previously) respectively. The central bank expects median core inflation expectations to remain at 1.6% this year and grow moderately to 1.8% in FY2024 – which remains below the BoJ’s target. With this in mind, it is highly likely that the BoJ will continue to maintain its accommodative monetary policy until sustainable inflation emerges.

Chart 1: UK inflation rate. Source: Trading Economics
Chart 1: UK inflation rate. Source: Trading Economics

On the other hand, the latest UK CPI release for December recorded 10.5% year-on-year last year (slowing for the second consecutive month, after peaking at 11.1% in October), in line with market expectations and 10.7% previously; month-on-month, the figure recorded 0.4%, in line with market expectations and the previous value. December core CPI recorded 6.3% year-on-year last year, in line with the previous value and market expectations of 6.2%; month-on-month, the figure registered 0.5%, slightly above market expectations of 0.4% and the previous value of 0.3%.

In addition, the UK also released its Retail Price Index for December. The CPI and retail price data showed that the effects of the central bank’s tightening policy over the past few months have been gradually reflected and price growth has slowed.

Figure 2: UK interest rates. Source: Trading Economics

The Bank of England will publish its interest rate resolution and meeting minutes of on 2 February. The central bank raised interest rates by 340 basis points to 3.50% between December 2021 to December 2022. This is also the highest level since the end of 2008. Yesterday’s economic data showed that the UK labour market remains tight, however given the general expectation of weakening growth momentum, the Bank of England is likely to slow its tightening pace. Analysts at several institutions predict that interest rates could peak at between 4.25% and 4.75%.

Technical analysis:

GBPJPY rallied strongly and tested key resistance at 160.50 after the BoJ resolution. This level is FR 50.0% of last September’s low extending to the October high. A break above this level will provide more boost to the bulls and is expected to further test the next resistance at 163.25 (FR 38.2%), dynamic resistance at the 100-day SMA and 166.65 (FR 23.6%). On the other hand, if the breakout of the currency pair is not effective, it could retrace and retest the 157.80 support (FR 61.8%), 153.90 (FR 78.6%) and last September’s low of 148.92.

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Larince Zhang

Market Analyst

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