The Bank of Japan’s (BoJ) decision to move away from negative rates was relatively smooth for stocks and bonds but unsettling for the yen. The USD/JPY surged past 151.50 following the BoJ’s commitment to maintain accommodative policies and continue buying Japanese government bonds. Despite dovish signals from the European Central Bank (ECB) and hawkish moves from the BoJ, the EUR/JPY reached a new high.

The BoJ meeting disappointed yen bulls but brought relief to Nikkei bulls and overseas markets, especially US bond markets, as the BoJ’s normalization will be gradual. The Nikkei index rose above the 40,000 mark, driven by robust Japanese company earnings, benefits from US-China tensions, a weak yen, loose monetary conditions, and corporate governance reforms. The yen may appreciate once the BoJ’s reaction settles, but the selloff in Japanese bonds is expected to be limited, and the outlook for Japanese stocks remains positive.

Focus now shifts to the Federal Reserve (Fed), which is likely to keep rates unchanged, update its dot plot, and possibly hint at slowing Quantitative Tightening (QT). With inflation upticks, strong economic growth, a healthy job market, and robust earnings, some Fed members may plot fewer rate cuts for the year, shifting the median forecast to two rate cuts from three. However, if the Fed hints at slowing its balance sheet unwinding, the reaction may be limited.

Ahead of the Fed decision, the dollar index is rising, the 2-year yield is below 4.70%, and the S&P500 flirts with all-time highs. In FX, the EUR/USD tests the 100-DMA, while Cable prepares to return to a downtrending channel following softer-than-expected UK inflation data. Commodity prices are pressured downward by a strong US dollar and rising US yields, except for US crude, which extended gains past $83.50pb on the back of declining US oil inventories.

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