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Market holds its breath for Bank of Japan monetary policy meeting

07 April, 2014

The Asian market currencies are the focus of trading this week with investors eagerly awaiting the press conference following the conclusion of the two-day Bank of Japan meeting on Tuesday when it is expected policy makers will announce whether they intend to expand the existing quantitative easing program. The overall aim of this program is to support growth and inflation in Japan, the latter with a target of 2% which is looking increasingly challenging. There are now fears that the increase in sales tax last week from 5% to 8% will further burden the struggling economy and thus Japanese policy makers may decide to intervene with further support for the economy as early as at this week’s meeting. If this is the case, we expect to see a huge surge in volatility from the market.

The US dollar slipped against the yen in early trading this week to 103.00 in advance of the BoJ meeting and in response to Friday’s US jobs data that fell short of expectations. Only 192,000 new jobs were added to the market in the previous month, less than the expected 200,000, but the unemployment rate remained steady at 6.7%. While the March results were a little short of expectations, Federal Reserve Chairwoman Janet Yellen highlighted the importance of an easy monetary stance, stating that the economy is unable to cope without it. The Fed is still expected to continue with a hawkish approach by reducing asset purchases at the current pace of $10 billion a month. The USD/JPY pivot point is 103.13, with resistance levels at 103.17, 103.22 and 103.26; and support levels at 103.07, 103.03 and 102.98.

The other main focus this week is on unemployment data due from Australia on Thursday. The consensus from market analysts is that they are expecting to see the jobless rate jump from 6.0% to 6.1% and, if this forecast becomes a reality, it will be interesting to see whether the Reserve Bank of Australia (RBA) moves away from the hawkish stance they have adopted recently since seeing a pick-up in inflation. AUD eased in early trading on Monday with AUD/USD trading at 0.9286. The AUD/USD pivot point is 0.9286, with resistance levels at 0.9290, 0.9295 and 0.9299; and support levels at 0.9281, 0.9277 and 0.9272.

The EUR weakened last Thursday to a one-month low against the dollar of 1.3673 after European Central Bank President Mario Draghi announced the central bank was prepared to use “unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation.” Draghi also left the interest rate unchanged at 0.25%, maintaining his wait-and-see stance which seems to be his favoured strategy. There are no substantial data announcements scheduled for the Eurozone this week, however both German trade balance and French industrial production figures should be closely watched for indications of whether trade sanctions with Russia over the Crimea conflict are having any impact on the Eurozone’s largest economies. The EUR/USD pivot point is 1.3714, with resistance levels at 1.3723, 1.3729 and 1.3738; and support levels at 1.3708, 1.3699 and 1.3693.

The Bank of England will make its monthly monetary policy announcement on Thursday, however no change is expected to be made to the current interest rate level of 0.5% and asset purchases are also expected to remain unchanged at £375 billion. Given that the central bank’s monetary policy has remained unchanged since July 2012, this is likely to be a non-event in terms of market volatility. Disappointing UK PMI surveys pressured the pound lower against USD on Friday to 1.6556, which was the weakest it has traded since March 26. The GBP/USD pivot point is 1.6572, with resistance levels at 1.6578, 1.6586 and 1.6592; and support levels at 1.6564, 1.6558 and 1.6550.

What to Watch this Week: The main event for forex traders this week is undoubtedly the conclusion of the Bank of Japan meeting and the associated press conference where volatility in USD/JPY is expected, especially if the quantitative easing program is expanded. The Asian sessions are likely to offer the greatest opportunities for traders this week.

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