Europe opens lower as Bank of Japan stuns markets with unexpected adjustments to policy settings | Popgen Tech

European markets had a modestly positive start to the week yesterday in what looked to be a fairly quiet week as we enter the dying embers of a year that has seen some significant volatility and weakness.

US markets on the other hand fell sharply as rising yields acted as a major drag on the technology sector in particular, with the Nasdaq 100 leading the losses. Once again, uncertainty about the Fed’s rate path next year appears to be keeping most people on the sidelines as investors draw a line under their 2022 portfolios.

Asia markets also fell after this morning’s surprise move by the Bank of Japan to adjust its monetary policy settings by widening the band on its yield curve control policy by 25bps.

Even before this morning’s events, it seemed unlikely given the uncertain rate backdrop that we were likely to get any sort of so-called Santa rally this late in the day. The reality is that anyone who made any money this year will be happy with their gains, while the rest probably won’t want to compound their misery in 2022 with more potential losses.

As a result, we can expect European markets to open sharply lower in the wake of this morning’s surprise move by the Bank of Japan to adjust its yield curve control settings.

Today the Bank of Japan completed the cycle of central bank rate decisions over the past week with its latest policy meeting, and a surprise decision to widen the band of its yield curve control to between -0.5% and +0.5%, from +/- 0.25% sent the yen soaring in a move that caught the markets completely off balance.

The recent weakening of the US dollar has been a welcome boost for the BoJ and has pushed the Japanese yen above previous intervention levels of just below 150.00, meaning Japanese policymakers are expected to be much more relaxed about where the yen is , than they were two months ago.

Some of the recent yen strength has also come from some rumblings that the BoJ may start looking at changing its current policy on yield curve control now that national CPI has edged up to 3.7%, its highest level in 8 years , however there was little indication that the central bank was inclined to change its policy settings so soon, and at a time when market activity tends to be thinner than normal.

It was only over the weekend that reports emerged that new Prime Minister Kishida was looking at adjusting the central bank’s mandate when incumbent Governor Kuroda resigned in April, causing the Japanese yen to rise briefly, before reports by the Japanese government is denied in a step that is not entirely surprising. Even if they were thinking along those lines, they are unlikely to confirm the reports so far in advance.

The timing of this morning’s move is even more surprising as at one point a move was expected, with most expecting a move in the early part of next year, there was a general feeling that policymakers wanted more certainty be that the recent move higher inflation is not as temporary as in 2014, when inflation was at similar levels.

It also suggests that the Bank of Japan is starting to worry about policy easing and inflation becoming more entrenched. It also gives them more flexibility in 2023 if they need to start hitting the brakes to avoid a significant overshoot in inflation, with the potential for us to see a rate hike before the end of next year.

EUR/USD – Posted a potential key day reversal last week, after pushing up to 1.0735. This holds the onus to the downside with support at the 1.0520 area, with further support at 1.0330/40.

GBP/USD – Saw a bearish reversal on cable last week after it failed at 1.2450. We currently find support at the 200-day SMA at 1.2110, with a break below the 1.2100 area possibly opening the 1.2000 area. Currently has resistance at the 1.2280 area.

EUR/GBP – Currently seeing resistance at the 0.8770/80 area, with a break targeting the 0.8830 area. Currently supported at the 200-day SMA with a break below 0.8540 opening further losses towards 0.8480.

USD/JPY – Dipped below the 200-day SMA at 135.70, opening a sharp move lower to 130.00. Currently has resistance at the 138.00 area, with a break possibly retargeting 140.00. A joint break below 200-day SMA retargets the lows at 133.60.

FTSE 100 expected to open 60 points lower at 7,301.

DAX is expected to open 200 points lower at 13,743.

CAC40 expected to open 78 points lower at 6,395.