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Forex Today: BoJ pledges flexibility in YCC policy, USD rally pauses ahead of PCE inflation

Here is what you need to know on Friday, July 28:

The Japanese Yen fluctuated wildly during the Asian trading hours on Friday and the Nikkei 225 Index fell sharply as markets assessed the monetary policy decisions of the Bank of Japan. Meanwhile, the US Dollar went into a consolidation phase following Thursday's impressive rally. Consumer and business sentiment data from the Eurozone and Personal Consumption Expenditures (PCE) Price Index from the US will be watched closely by market participants ahead of the weekend. 

The BoJ left monetary policy settings unchanged after July meeting, maintaining the policy rate at -0.1% and allowing the 10-year Japanese government bond yield to fluctuate in the range of around plus and minus 0.5%. The bank, however, said in its policy statement that it will “conduct yield curve control with greater flexibility, regarding the upper and lower bounds the range as references, not as rigid limits, in its market operations.” BoJ Board member Toyoaki Nakamura dissented the guidance on the yield curve control (YCC) stance, noting that it would be desirable to allow greater flexibility after confirming rise in firms' earnings power from sources such as financial statements statistics. Following a quick decline to a fresh 10-day low near 138.00, USD/JPY staged a rebound and was last seen trading slightly above 139.00.

On Thursday, upbeat macroeconomic data releases from the US provided a boost to the US Dollar Index (DXY) and helped it erase the losses it suffered on Wednesday following the Federal Reserve's policy announcements.

The real Gross Domestic Product (GDP) in the US expanded at an annual rate of 2.4% in the second quarter and Durable Goods Orders rose by 4.7% in June. Additionally, weekly Initial Jobless Claims came in at 221,000, much lower than the market expectation of 235,000. The DXY rose more than 0.5% on Thursday and was last seen moving sideways above 101.50. In the meantime, US stock index futures trade in positive territory after Wall Street's main indexes closed in the red on Thursday. Finally, while the 10-year US Treasury bond yield holds steady slightly below 4%.

Pressured by the European Central Bank's (ECB) dovish tone and the renewed US Dollar strength, EUR/USD suffered heavy losses and dropped below 1.1000 for the first time in over two weeks on Thursday. At the time of press, EUR/USD was consolidating its losses at around 1.0980.

GBP/USD lost more than 100 pips on Thursday and continued to push lower in the Asian session on Friday. After touching a three-week-low of 1.2763, the pair recovered toward 1.2800 heading into the European session.

Surging US yields weighed heavily on gold price on Thursday and XAU/USD dropped below $1,950. Early Friday, the pair stages a modest rebound and holds steady above that level.

The data from Australia showed that Retail Sales declined 0.8% on a monthly basis in June. Moreover, the Producer Price Index rose 3.9% in the second quarter as expected, down noticeably from 5.2% increase recorded in the first quarter. AUD/USD stays under strong bearish pressure following Thursday's decline and trades deep in negative territory at around 0.6650.

Bitcoin struggles to find direction and continues to move up and down in a tight channel slightly above $29,000. Ethereum holds steady at around $1,850 following Thursday's 0.6% decline.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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