BoJ rate hike boosts yen strength

The Bank of Japan raised its benchmark rate by 25 basis points to 0.5%, signaling a pivotal shift to tackle persistently low real interest rates

By Farah Mourad | 24 January 2025

Market open
  • Japan's December CPI came in at 3.6%

  • EUR/USD held near 1.0450

  • Gold surged to $2,778

Asian markets

The markets concluded the week with a pivotal decision by the Bank of Japan (BoJ), which raised its benchmark interest rate by 25 basis points to 0.5%, aligning with market expectations. This move, accompanied by an upward revision of inflation forecasts and a clear signal toward further tightening, underscores Japan's growing focus on tackling low real interest rates. Core CPI inflation for 2025 is now projected at 2.4%, a significant jump from the previous estimate of 1.9%. December's CPI reading also exceeded forecasts at 3.6%, reinforcing the BoJ's hawkish stance.

In response, the Japanese yen appreciated against the US dollar, with USD/JPY dipping to 155.20, down 0.49% intraday. The yen's gains, however, were measured, as broader markets digested mixed signals, including comments from former U.S. President Donald Trump on tariffs. Trump suggested he would prefer not to impose additional tariffs on China, hinting at potential trade cooperation, which added some support to risk sentiment.

European Markets and the Euro

The euro maintained its strength in early European trading, with EUR/USD hovering near 1.0450. The pair benefited from ongoing US dollar weakness, driven by softer Treasury yields and a lack of aggressive hawkish signals from the Federal Reserve. Market participants now turn their attention to the Eurozone and German preliminary PMI readings for January, which could provide further direction.

Commodities

Gold extended its bullish momentum, reaching a fresh multi-month high near $2,778. The metal's rise was supported by a combination of lower US bond yields and Trump's remarks signaling a cautious approach to tariffs, which eased inflationary fears. Despite slightly overbought conditions, gold remains on track for its fourth consecutive weekly gain, underpinned by ongoing uncertainty around global trade policies and a weaker dollar.

Silver prices followed gold's lead, buoyed by demand for safe-haven assets amid declining Treasury yields and a softer greenback. Investors also interpreted Trump's comments as a potential signal for more accommodative monetary conditions, which bolstered the appeal of non-yielding assets like silver.

WTI crude oil prices remained under pressure, trading around $74.10 per barrel. Sentiment in the oil market was dampened by Trump's calls for Saudi Arabia and OPEC to reduce oil prices. His remarks at the World Economic Forum in Davos added uncertainty to energy markets, as traders weighed the potential impact of U.S. pressure on OPEC's production policies.

As the trading week draws to a close, markets remain focused on upcoming global PMI releases for further insights into economic conditions.