Forex Markets Mixed Ahead of Bank of Japan Stimulus Decision

The Forex markets were mixed on Thursday as investors prepared for the Bank of Japan’s monetary policy announcement early Friday. Some markets continued to respond to yesterday’s U.S. Federal Reserve’s monetary policy statement that noted the upbeat economy, but failed to convince investors that a rate hike was imminent. Investors still feel that it’s still 50/50 the Fed will raise rates in December.

Short-covering and position-squaring due to technically oversold conditions continued to support the EUR/USD. Buyers came in earlier in the week at 1.0951, slightly above the post-Brexit low at 1.0910. However, the market is likely to remain range bound until at least September when the European Central Bank comes back from summer vacation. Additionally, it doesn’t look like the major players want to make a move until the U.K. formally makes its request to leave the European Union and the process of exiting the EU begins.

The GBP/USD retreated after posting a gain on Wednesday in response to the Fed’s somewhat dovish tone. Even if there is a rally, gains are likely to be capped because the bigger players are likely to be shorting in anticipation of a Bank of England interest rate cut on August 4.

The USD/JPY weakened on Thursday as investors increased bets the Bank of Japan will fail to come out with a stimulus package strong enough to turnaround the economy. Traders are expecting some action from the BoJ early Friday, but there’s a huge variance around those expectations.

There are some risks surrounding the BoJ decision. This is causing the price of hedge protection to soar. Traders expect the central bank will increase some asset purchases tomorrow and also cut interest rates by a small amount, perhaps by 10 basis points. The big risk is if they didn’t do anything.

September Crude Oil futures fell to a new three-month low on Thursday as producers continued to increase output more than needed and the outlook for demand growth weakened.

The market weakened on Thursday after private forecaster Genscape said its data showed a 300,000-barrel build of crude stockpiles through June 26 at the Cushing, Oklahoma delivery point for the West Texas Intermediate contract.

December Crude Oil continued the rally set off by the Fed statement on Wednesday. This is an indication that investors feel the central bank will wait until at least December before hiking rates.

In U.S. economic news, Weekly Unemployment Claims rose to 266K, higher than the 261K estimate and above last week’s 252K reading. On Friday, the U.S. will release Advance GDP and Revised University of Michigan Consumer Sentiment.