The Bank of Japan, as it always does, surprised markets by moving the benchmark rate into the negative territory at -0.10% and the USD/JPY strengthened more than 300-pips.

Reaction in the Japanese markets

  • USD/JPY up more than 2%
  • Japan now has negative yields on 7-year government bond
  • Nikkei closed with 2.8% gain. 

Moderate risk-on, but no fireworks

  • The equities across Europe rallied. The DAX was up around 0.60% before the US opening bell, but has now extended gains to trade 1.4% higher. The Dow also advanced 1.2%. 
  • Meanwhile, the GBP/JPY and EUR/JPY are up 1.3% each. 
  • US treasury yields dropped. The 10-year yield fell to four month low, while the 2-yr yield hit three month low
The markets have reacted positively; however, the risk-on is not as strong as seen in the past. BOJ’s easing usually leads to 3% gains in the major equity markets across the globe, while the JPY fell sharply across the board. This may be due to markets slightly cautious as –
  • BOJ moved to uncharted territory and 
  • Speculation the bank is no more comfortable with purchasing more JGBs and hence resorting to negative rates. 

GBP/USD drops sharply, BOE rate cut ahead?

  • The GBP/USD is down 1%. The high yielding currencies – AUD, NZD are unable to do much against the USD 
  • The negative rate in Japan means more outflows from Japan in search of high yields. This should have led to a much sharper rally in the JPY crosses – GBP/JPY and thus should have lend support to the GBP/USD pair. 
  • However, the cable is down 1%, which clearly indicates the markets believe negative rates in Japan would force the Bank of England to delay its rate hike even further. 
  • EUR/USD is down as well, again due to speculation that ECB would have to do more. More pressure on the ECB also means pressure on the BOE. BOE benchmark rate stands at 0.5% and the bank certainly has room to cut rates, given the ECB, SNB and BOJ are in the negative territory. 
  • We have already seen BOE make a transition from “rates could rise at the turn of the year” to “now is not the time to hike rates” on account of low inflation and strong GBP. The transition was anticipated here ( last year in March. 
  • Hence, it would not be surprising if the BOE actually moves towards rate cut now. 
Even the derivative markets hint at a chance of a BOE rate cut now. UK derivatives markets earlier this week priced in a marginal chance of a cut in Bank of England interest rates in the next six months. 

Stay tuned as the marginal chance could become a certainty in next six months amid retaliation and counter retaliation from major central bankers. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis

Latest Forex Analysis

Editors’ Picks

AUD/USD jumps back above 0.6950 as risk-on mood dominates

Following a bearish opening gap, AUD/USD has recovered ground and trades above 0.6950, tracking the bounce in the S&P 500 futures. The bulls shrug off US-China tensions and the worsening coronavirus situation in the US and Australia. 


USD/JPY bears holding their positions below 107 level

Yen remains a safe haven currency of choice as trade wars and the coronavirus play havoc risk apatite. Investors pin hopes on Gilead Sciences reporting that its antiviral drug Remdesivir recorded positive results in clinical trials.


Gold: Pierces $1,800 inside short-term bullish flag

Gold prices extend recoveries from $1,798.14, defies two-day losing streak. A seven-day-old bullish technical pattern, sustained trading beyond immediate support favor the buyers. 200-HMA offers additional downside support, bulls will cheer break of $1,811.60.

Gold News

WTI: Depressed above $40 amid output cut talks

WTI defies the late-Friday recovery moves while slipping from $40.80. Saudi Arabia pushes for two million barrels a day output cut, IEA improves on oil demand forecast. Risk-tone remains mildly positive amid virus woes, US-China tension.

Oil News

S&P 500: Bank's earnings in focus, COVID-19 induced insolvency fears simmer away

The S&P 500 will be a key theme on Q2 earnings this week, traders watching the banks for guidance. Wall Street stocks remain in bullish territory, but the S&P 500 is on thin-ice while below the June highs. 

Read more

Forex Majors