The Impact of the Bank of Japan’s Recent Rate Hike on Global Currency Markets

On Wednesday, the yen experienced volatility after the Bank of Japan (BOJ) raised interest rates at the conclusion of its two-day monetary policy meeting. The BOJ also unveiled a detailed plan to taper its extensive bond-buying program.

Initial Reaction to BOJ Announcement

The yen surged by 0.8%, reaching a three-month high of 151.58 per dollar immediately following the BOJ’s announcement. However, these gains reversed sharply within minutes as the market had anticipated this outcome. As of the latest update, the yen was marginally lower at 152.79 per dollar.

BOJ’s Monetary Policy Changes

The BOJ’s board decided in a 7-2 vote to increase the overnight call rate target to 0.25% from the previous 0-0.1%. Additionally, the BOJ announced a quantitative tightening (QT) plan, aiming to halve monthly bond purchases to 3 trillion yen ($19.63 billion) from the current 6 trillion yen, effective January-March 2026.

Market Reactions and Expectations

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, noted, “The market had already been set up for a hawkish expectation. While the decision was hawkish due to the rate hike, it was balanced by the less-than-expected quantitative tightening.”

Prior to the BOJ decision, various news reports had hinted at a possible rate hike, setting the market’s expectations accordingly. Despite this, the yen appeared poised to end July with a gain of more than 5%, driven by Tokyo’s interventions and the unwinding of short-yen carry trades.

Global Market Updates

Investors are also eyeing inflation data from France and the wider eurozone, along with a policy decision from the U.S. Federal Reserve later in the day, which is expected to be a significant market mover. Geopolitical tensions continue to add to market uncertainty.

Australian Dollar and Inflation Data

The Australian dollar fell to its weakest since May after core inflation data came in lower than expected, reducing the likelihood of another rate hike. The Aussie was down 0.68% at $0.6494, heading for a monthly loss of over 2%.

Markets have now abandoned expectations of further rate hikes from the Reserve Bank of Australia (RBA), instead predicting an easing as early as November. “This quarterly CPI print isn’t sufficient to convince the RBA to hike by 25bp next week,” said Chris Weston, head of research at Pepperstone.

China’s Economic Activity

China’s manufacturing activity contracted for the third consecutive month in July, according to an official factory survey. This keeps expectations high that Beijing will need to implement more measures to support its fragile economic recovery. The yuan was last up 0.2% at 7.2374 per dollar.

Anticipating the Fed’s Decision

The euro rose 0.08% to $1.0824, aiming for a 1% gain in July, supported by a weakening dollar. Despite slightly better-than-expected economic growth in the eurozone for the second quarter, the outlook remains cautious.

Sterling advanced 0.06% to $1.28445, looking at a monthly gain of 1.6%. The New Zealand dollar edged up 0.02% to $0.5904 but was on track for a 3% monthly loss.

Market Focus on the Fed

Traders are eagerly awaiting the Federal Reserve’s rate decision, expected to be the next significant catalyst for currency movements. Market expectations are leaning towards the Fed laying the groundwork for a rate cut in September, with approximately 68 basis points of cuts anticipated for the rest of the year.

The dollar index dipped 0.04% to 104.39, poised for a monthly loss of nearly 1.4%. Julien Lafargue, chief market strategist at Barclays Private Bank, commented, “We expect the Fed to open the door to a first interest rate cut in September. Such a move today could send the wrong signal to markets and spook investors.”

Conclusion

Stay updated with the latest developments in global financial markets as key decisions from central banks continue to influence currency movements and economic outlooks.

($1 = 152.7900 yen)