Forex Flash: Inflation targets hold different fortune for JPY, GBP – UBS

The BoJ kept all monetary policy settings unchanged overnight – there were no changes to asset purchase targets and no interest rate adjustments either. The USD/JPY dropped 10 pips afterwards but quickly recovered. Remarks by Kazumasa Iwata, one of the candidates for BoJ Governor, were more market moving however. He reportedly said that a yen correction is needed to reach the 2% inflation target, and that the USD/JPY in the range of 90-100 is just a return to equilibrium.

According to Research Analyst Gareth Berry at UBS, “Meanwhile sterling continues to look vulnerable in the wake of Wednesday's quarterly inflation report. FX investors have been willing to turn a blind eye to above-target inflation in the past, but the prospect of this continuing until 2016 seems to have provoked a change of heart.”

Finally, “Gilts weakened yesterday on the news, and with further QE looking increasingly unlikely, sterling-negative outflows could ensue. “We remain focused on the upcoming UK Budget on March 20th, and any subsequent comments by ratings agencies.” Berry adds.