AUD steady ahead of key Bank of Japan policy update

Key Movers

With ample news flow and data to digest, price action across majors was mixed as the euro underperformed and the GBP outpaced most counterparts. Euro area rates plunged after Bloomberg reported European Central Bank policy makers were starting to consider a slower pace of adjustment, pivoting away from guidance proffered by President Lagarde in December. With a 50-point hike all but priced in next month, there is gathering support within the European Central Bank to temper the pace of future adjustments with a 25-point increase in March well bid. The correction in European Central Bank rate expectations drove euro area rates lower and dragged the currency toward intraday lows below US$1.0780.
In contrast, the pound outperformed all other majors as robust labour market data helped fuel a run through US$1.22 and US$1.2250. While the pace of new hires slowed, conditions remain tight, with unemployment comfortably below 4% and wage growth, excluding bonuses approaching 20-year highs. Labour market resilience has fueled expectations for further Bank of England rate hikes, with the market pricing an increased chance of another 50-point hike in February. Having touched intraday highs at US$1.2294, the pound has edged lower leading into this morning’s open and currently buys US$1.2276.
Against a backdrop of lower rates, the yen advanced, pushing the USD toward ¥128.30 ahead of today’s all-important Bank of Japan policy meeting. With policy makers struggling to control 10-year rates, it is clear the current yield curve control program is operating on borrowed time. With inflation gathering pace, even a small change in policy direction will have significant ramifications for global bond markets and the yen.