The Yen surged to four-month highs, US data coming into focus

On Tuesday, European markets are expected to open lower as investors evaluate the outlook for interest rates in 2023, which could lead to a further decrease in prices. Meantime, US housing data and Canada's retail sales figures stand at the top of the economic announcements for today.

The yen surged to a four-month high against the dollar on Tuesday, making it one of the most notable FX moves of Tuesday. The Bank of Japan announced on Tuesday that its yield curve control policy would be reviewed, and in an unexpected move, it widened the trading band for 10-year government bond yields.

Despite keeping the basic policy settings unchanged - in which the short-term JGB yields are pinned at -0.1% and the 10-year yields hover around zero - it expanded the allowable band for long-term yields to 50 basis points on either side of that level, up from 25 basis points.

The USD/JPY is falling nearly 400 pips on Tuesday, at around 133.00, following the Bank of Japan's announcement that it will be willing to ease policy further if needed. In the press conference, BOJ Governor Kuroda reiterated that the Bank would not hesitate to do so. However, this did not prompt the pair to react.

US dollar sinking

The US Dollar Index dropped 0.21% to 104.42 on Thursday, bringing the greenback back up to the middle of its trading range this month which stretches from 103.44 to 105.90. The US dollar index is a measure of the greenback's strength against the yen and five other major peers, including the euro and pound.

Before the BOJ announcement, the index had been moving towards the top of that range as investors continued to digest the Federal Reserve's message of higher interest rates for a longer period of time than expected.

A broad range of currencies lost value against the yen, with the euro dropping 3% at 140.90 yen to its lowest level since Dec. 2, while Sterling also fell 3% to its lowest level since Oct. 12 at 160.87 yen.

During the past week, the European Central Bank raised its key interest rate from 1.5% to 2%. The bank also announced that it would be shrinking its balance sheet by approximately 15 billion euros ($15.9 billion) every month from March 2023 through the end of June 2023. The ECB said it would need to maintain its rate hike at a steady pace.

The Bank of England and the Swiss National Bank struck similar tones and also opted for 50 basis points hikes, in line with the Federal Reserve's decision on Wednesday. In addition, Jerome Powell stated that the Federal Reserve will continue to do its part to rein in inflation for years to come. He also stated that policymakers must continue to make efforts to rein in inflation until it is achieved.

Events to watch

There will remain a heavy focus on the upcoming investors will be concerned about the latest US consumer inflation figures and housing market data. These figures will have a profound impact on the Fed's policy outlook and the USD. The outcome will play a crucial role in helping determine the next leg for the USD/JPY pair in its directional move. The US will release its Weekly Initial Jobless Claims data on Thursday, and traders will be able to take cues from that release as well. Using this information along with US bond yields and broader market risk sentiment, we will be able to pinpoint short-term trading opportunities around the USD/JPY pair.