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Last week, the Swiss National Bank (SNB) made its first policy rate reduction since 2019, indicating the possibility of another cut in June. Despite this adjustment to a new lower policy rate of 1.50%, inflation is still expected to fall short of the target. As a result, strategic positioning suggests that both EUR/CHF and USD/CHF will likely continue an upward trajectory in the second quarter, with the SNB ready to intervene in the foreign exchange market if necessary.
The decision to lower rates by 25 basis points to 1.50% was prompted by recent months' lower inflation trajectory. Chair Jordan's remarks on price stability and the currency since January heightened the likelihood of a policy shift this month. With new inflation projections indicating a potential further decrease to 1.25% in June, the SNB is actively responding to economic indicators.
Revisions to inflation forecasts reflect adjustments in goods prices, with this year's estimate downgraded to 1.4% and next year's to 1.2%. Additionally, weak demand from abroad and the appreciation of the Swiss franc have dampened growth prospects, with the economy anticipated to grow by approximately 1% this year, potentially leading to a gradual increase in unemployment.
Looking at technical analysis, EUR/CHF has surpassed a significant hurdle at 0.9775, marking a 61.8% retracement from January 2023. While an initial pullback is underway, support remains crucial near last week's low of 0.9610.
EURCHF 1H
Meanwhile, despite the Bank of Japan's (BoJ) termination of negative interest rates and its decision to raise the policy rate from -0.1% to 0%, speculation surrounding FX intervention persists. The Yen weakened below 151 following the BoJ's move, prompting concerns addressed by top FX official Kanda regarding speculative pressures. USD/JPY's upward movement following the Federal Open Market Committee's decision to maintain three rate cuts this year was not challenged by retracements in U.S. Treasury yields.
The BoJ's decision to end over a decade of negative interest rates reflects confidence in achieving the 2% price stability target, with a focus on sustainable inflation through spring wage agreements. While the bank plans to maintain accommodative policies, it also indicated a willingness to counteract yen weakness with higher interest rates rather than adjustments to JGBs.
USDJPY H1
Looking ahead, economists project a potential increase to 0.25% in October, which may influence portfolio repatriation and contribute to a stronger yen over time. This, in turn, could impact long-term U.S. Treasury yields and the shape of the U.S. yield curve.
In terms of technical analysis, USD/JPY faces a critical resistance level at 152, representing last year's peak, with the ongoing uptrend likely to continue if breached. Short-term support is evident near the 50-day moving average at 149.10.
Insights Inspired by Societe Generale: Credit to Their Analysis for Shaping Some Aspects of This Text
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