"The Bank of Japan surprised markets today with a move that gave the impression of co-ordinated easing by the major global central banks, providing a welcome boost to confidence", comments Capital economics. "However, we had already expected them to ease by this amount in October, so although the timing is slightly earlier than we (and most others) had anticipated, it is not a game changer".
Even though it translated into yen weakness in the FX market, riskier currencies failed to benefit from the positive mood, with EUR/USD extending its decline briefly below 1.3000 and the pound unable to break 1.6250. "The minutes to the last BOE meeting had little impact on sterling, but its downbeat tone contributed to a 4 bp decline in gilt yields as one member of the MPC saw a 'good case' to expand QE further", said the BBH analyst team.
Looking ahead, a string of housing data is due for release in the US, where investors will be paying attention for signs of improvements in the sector.
Is EUR/USD rise overdone?
The euro has continued to lose ground on Wednesday, falling below the 1.3000 mark from a 4-month high of 1.3172 scored on Monday amid profit-taking as markets waited to see whether Spain would apply for aid and trigger the ECB's bond-buying program.
From a short-term view, Valeria Bednarik, chief analyst at FXstreet.com notes that, if EUR/USD breaks decisively below 1.3000, 1.2930, 61.8% retracement of this year fall, is the next target. To the upside, only steady gains above 1.3090 can reverse intraday bearish tone, and see the pair attempting a recovery towards the 1.3140/60 price zone, according to Bednarik.
In the longer term however, the EUR/USD direction is not that clear, and analysts remain divided on whether the shared currency can hold ECB and the Fed propelled gains.
According to Goldman Sachs team, short positioning in the EUR remains significant and a further unwind could push EUR/USD higher. "However, ongoing implementation risk in the Euro area and growth underperformance linked to front-loaded fiscal tightening are likely to be a drag on the EUR, while ongoing anemic global macro conditions may lead to less appetite for risky assets and in turn USD strength", they explain. "In the longer run – and after more 'muddling through' – we expect gradual progress with deeper integration in the Euro area, which should ultimately boost the EUR".
Goldman maintains its 3-, 6- and 12-month forecast for EUR/USD at 1.25, 1.33 and 1.40 respectively.
On the other hand, the Wells Fargo analyst team expects that the improvement seen recently to extend further in the next several weeks. "The longer-term euro trend remains lower however, given the Eurozone's economic underperformance and as the European monetary policy stance remains very accommodative", they say.
BoJ action driven by yen strength
The development in the JPY exchange rate will be extremely important for both the size and timing of additional QE, according to the Danske Bank analyst team. "Appreciation pressure on JPY will in our view be met will more aggressive monetary easing and possible direct intervention in the FX market".
"In our view, today's BoJ action underlines that last week's Fed action have huge ramifications", they add. "Whether BoJ likes it or not the Fed action forced the BoJ to ease today to avoid a new appreciation of the JPY. All in all, we think that BoJ has taken an important step today".