BOJ to Keep the Volatility Fires Stoked

USD/JPY rebounded further after S&P boosted its outlook on US debt. The euro was the top performer while the yen lagged. Markets were slightly quieter in US trading but the upcoming BOJ decision could add a fresh dose of excitement.  In our latest edition of the Premium Insights, a new EURUSD long is added to the 2 existing EURUSD trades,  nearing a key confluence point highlighted in today's weekly and monthly charts. USDJPY is also added ahead of the BoJ announcement due at 03:30 GMT

The calendar was light to start the week but Standard & Poor's had an unexpected surprise as it changed its outlook on the US credit rating to stable from negative. The dollar broadly rallied on the headlines.

EUR/USD initially fell to 1.3185 and cable fell below 1.5500 but the knee jerk reaction was short-lived and both pairs later climbed more than 70 pips to session highs. The takeaway may be that better sentiment could help forge a deal to end the growth-sapping sequester.

The lone item of data on the calendar was Canadian housing starts, which smashed expectations of a 170K reading by climbing to a 200K pace. Canadian real estate is almost certainly a bubble but it isn't popping now and upbeat Canadian growth threatens to fuel further USD/CAD losses.

The yen has been the central character in markets this year and that continues in the hours ahead as the Bank of Japan finishes its two-day meeting. No game-changing announcements are imminent but there is intrigue and it won't take much to spark another big move in the yen.

The focus is on the BOJ program that offers loans for one year at 0.1%. Ahead of the meeting, there was speculation the term could be extended to two years but a story in Nikkei – likely a leak to tone down expectations – said there is disagreement at the BOJ on extending the measure.

If officials opt to maintain the status quo it could weigh on USD/JPY, which is trading close to 99.00.