US Dollar to get back in focus with BoJ disappointing markets

• The US Dollar overpowers the Japanese Yen by 1% in European trading on Tuesday. 
• Traders see BoJ missing the window of opportunity for a hike. 
• The US Dollar Index recovered on Friday, though not enough to change sentiment. 

The US Dollar (USD) is appreciating substantially against the Japanese Yen this Tuesday after Bank of Japan (BoJ) governor Kazuo Ueda delayed the timing again on the normalisation of the Bank’s monetary policy. Markets were gearing up for either this meeting or the next meeting to be the one that could bury decades of negative rates in Japan. Instead, Ueda dampened hopes for even the January meeting by saying that current conditions do not justify restricting its monetary policy, possibly indicating that BoJ might not normalise at all if economic conditions retreat further from their 2023 peak levels. 

On the economic front, this Tuesday will be focused on the US housing market. Building Permits and Housing Starts are set to be released. Slowly but surely the economic calendar is building up towards the focal points later this week on Thursday and Friday with US Gross Domestic Product and the Fed’s preferred inflation gauge, the Personal Consumption Expenditures – Price Index (PCE). 

Daily digest Market Movers: BoJ makes another mistake

• The European Central Bank (ECB) is trying to backtrack on earlier statements that rate cuts for 2024 are not on the cards. ECB member François Villeroy de Galhau said this Tuesday morning that the ECB should cut in 2024 after a plateau of holding rates steady.
• The Bank of Japan (BoJ) has probably missed its window of opportunity to hike out of negative rates. BoJ Governor Kazuo Ueda said that Japan is heading to 2% inflation under current conditions, and even gave forward guidance that the January meeting is not the right moment to adjust monetary policy. It looks that both inflation and macroeconomic conditions for Japan are heading back to normal levels which might never demand for monetary policy to strengthen. 
• Housing data at 13:30 GMT will be the most important element to watch this Tuesday:
  1. Monthly Building Permits are expected to head from 1.498 million to 1.470 million. Previous change was up 1.8%.
  2. The November Housing Starts number is expected to come in at 1.360 million, a touch lower than 1.372 million. Previous change was up 1.9%.
• Around 13:55 GMT, the Redbook Index for this week is due. Previous number was 3.4%.
• Asian equities are welcoming the standstill at the BoJ, and are popping higher. The Japanese Nikkei index is up over 1.4%. European and US equities are going sideways. In the US tech giant Apple is weighing now that the Chinese government has completely barred Apple products on the work floor. Domestically Apple is facing headwinds as well, as its Iwatch Ultra and 9 series are halted for sale because of a patent dispute on one of its technologies.  
• The CME Group’s FedWatch Tool shows that markets are pricing in a 91.7% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 8.3% expect the first cut already to take place.
• The benchmark 10-year US Treasury Note trades near 3.91%, and looks to be forming a floor. With the BoJ now not hiking, US notes are gaining a few basis points

US Dollar Index Technical Analysis: With a bit of help

Central Banks are having busy days in this very last normal trading week of 2023. From left and right central bankers are pulling everything out of their toolkit to tweak earlier mismanaged monetary policy communication. For the Federal Reserve, several members are pushing back against the markets that cuts are not going to come that quick. Several ECB members are now also backtracking and saying that cuts will come for sure in 2024 after European Central Bank President Christine Lagarde surprised them by saying cuts are not under consideration at all, at last week’s meeting. The narrative is changing again, and could switch back in full in favour of the US Dollar Index (DXY).

Still, US Dollar bulls have their work cut out to salvage what was lost last week. On the daily chart, look for 103.00 as the first level to keep an eye on. Once trading above there, the 200-day SMA at 103.50 is the next important level to get to in its recovery. 

To the downside, the pivotal level at 101.70, the low of August 4 and 10 is vital to hold. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.