Market Overview

Two major events which hit the money market recently are key to understanding the actions of the major central banks and further market developments. Namely, these events are the resignation of the British Prime Minister and possible market interventions by the Bank of Japan (BoJ).

The British Pound rose from all-time lows from 1.0600 to 1.13000. At the crack of the tax reform in the United Kingdom, the Bank of England (BoE) was forced to perform temporary quantitative easing to prevent a full-scale debt crisis. The BoE had to demonstrate to the market that a strong devaluation of the Pound is unacceptable,  otherwise inflation could rise dramatically and it could be followed by a collapse of the debt market. So, a sharp drop of the Pound is highly unlikely at this time.

GBP/USD has formed a triangle on the daily chart, which means uncertainty for the Cable. Nonetheless, the pair has a downside trend and the Pound may move in either direction within this triangle. This movement is difficult to distinguish as it is likely to be directed by unpredictable events.

The Japanese Yen did indeed surprise investors but it was not due to the BoJ’s intervention into the market that the USD/JPY dropped by 4% from 152 to 146.2 in a single day. The surprise was the speed of the devaluation of the Yen itself as it dived to  lows not seen since 1990.  The U.S. Dollar index (DXY), which shows how the U.S. Dollar is trading against a basket of six foreign currencies,, including the Yen, has been rising since the beginning of August from 104 points to 114 points, or by 9.6%. The index has gained 20% from the beginning of 2022 and so the Dollar has strengthened against the Yen by 16% since August from 131 to 152. But since the beginning of the year this rise was from 115.6 to 152. So, the Dollar has strengthened by 66% above average against the other currencies in the basket. This may be explained by the loose monetary policy of BoJ that has no need to tame inflation as it is low at 3% and so continues to run on low interest rates and quantitative easing.

However, other countries with currencies within the DXY have much higher inflation: the Eurozone – at 9.2%, the U.K – at 10.1%, Canada – at 6.9%, Sweden – at 10.8%. Central banks in these countries are gradually rising their interest rates. Even the Swiss National Bank, which is currently facing inflation of 3.3%, is also raising interest rates. But not the BoJ who is seen to be welcoming the strengthening of the Greenback in contrast to other governments of developed countries that are suffering from rising import prices, including prices on energy. Japan has much lower inflation and is not struggling with crude imports. But a weaker Yen lowers the prices of Japanese exports, eases debt servicing while activating economic growth. So, Japan is very interested in devaluing the Yen to the Dollar. Is it a good reason for the BoJ to let the Yen free fall? On the other hand, such policy pushes the Greenback up and this is not good for other developed nations, including the United States, that are now facing struggling stock markets. As these are the current circumstances, the decision to intervene within the market  by the BoJ could not only come from the monetary regulator of Japan but may be a coordinated action of other central banks too. The market has seen examples of such “coordination”. So, it could be a mutual decision of the leading central banks that are not welcoming the strengthening of the Greenback and could be seen ready to weaken the Dollar despite delivering tighter monetary policy and raising interest rates to tame inflation.

In this scenario there is a possibility that the market has seen the top of the DXY even if the Federal Reserve does bring its interest rates to 4.5-5%. That means that the lows for the GBPUSD at 1.0600 and for the USDJPY at 152 may remain unchanged while the record for DXY at 115 may not be beaten in the foreseeable future. Anyway, these technical levels are set and would be hard to be broken.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.