Euro rose in Asian trade on Wednesday against the yen, extending gains for the second straight session and scaling a 16-year peak following a historic policy decision by Bank of Japan.

The BOJ raised interest rates for the first time since 2007 while expecting to maintain current accommodative policy tools for the time being. 

The BOJ almost dismissed the possibility of further interest rate cuts this year, in turn dashing hopes of closing some of the policy gap with European and US interest rates. 

EUR/JPY

EUR/JPY rose 0.5% to 164.70, the highest since August 2008, with a session-low at 163.79, after rallying 1.1% yesterday, the biggest profit since late January after timid remarks by the BOJ following its rate hike.

The ECB 

On the other hand, the European Central Bank is considering the proper timing to announce the ending of the current fight with inflation and the unrolling of current policy tightening measures.

While inflation is approaching the ECB’s targets, policymakers remain concerned about a premature rate cut before wages are put under control. 

Thus markets are betting on a delay of the first ECB interest rate cut until June, however the decision will eventually depend on inflation and GDP data.

The BOJ

In a historic decision, the Bank of Japan finally exited eight years of negative rates, and raised them by 20 basis points to below 0.1%, the first such increase since 2007.

The BOJ asserted that any upcoming interest rate hike will be modest, and it expects to “maintain current accommodative conditions for the time being”. 

BOJ Governor Kazuo Ueda said he doesn’t expect interest rates on deposits or borrowing to rise sharply next year. 

Interest Rate Gap

The current Europe-Japan interest rate gap stands at 450 basis points and is expected to hold at this level for an extended duration.

Natural gas prices tumbled by 62% in the US last year, as production surged past demand.

The drop in gas prices boosted the exports of US liquefied natural gas and reduced the costs of in-house heating, creating more disposable income. 

And indeed, the US labor statistics office said that the drop in natural gas prices played an important role in boosting economic performance and raising cash reserves, which were used on other products and services. 

The drop in natural gas prices also means a drop in the costs of fertilizers sometime in the future, which could lead to lower food prices. 

Some analysts warn that lower natural gas prices could make the production of the gas uneconomic, especially as most of the output growth last year came in the form of gas accompanying oil wells.

For oil operators, producing the gas costs next to nothing, but for dedicated gas operators, it’s a blow. 

EQT, the largest gas producer in the US, recently announced plans to strategically reduce production in response to prices, starting with 7-8% reductions in February. 

However, the modest cuts in production won’t quickly affect prices quite yet, as natural gas futures still trade at below $2 per million British thermal units. 

It seems that traders have already priced in the upcoming expected decline in gas production in the US.

Reuters recently reported that total natural gas production in the US fell by 7% in February, however prices fell by nearly 27% in the first two months of the year, especially as demand declines and the weather warms up. 

Most US stock indices advanced early on Tuesday ahead of the important Federal Reserve’s policy meeting this week. 

The Fed will open its two-day policy meeting later today to discuss latest inflation data which continued to prove resilient. 

Tomorrow, the Fed will announce its results, with Fed Chair Jerome Powell holding a subsequent press conference to discuss the decisions. 

There’s a 99% chance that the Federal Reserve will hold interest rates unchanged according to the Fedwatch tool.

Earlier government data showed housing starts surged by 10.7% m/m in February, and by 5.9% y/y.

Building permits rose by 1.9% m/m last month, and by 2.4% y/y. 

On trading, Dow Jones rose 0.5%, or 197 points to 38,985, while S&P 500 rose 0.1%, or 2 points to 5151, as NASDAQ shed 0.3%, or 41 points to 16,061. 

Global oil prices fell in European trade for the first time in five sessions off four-month highs on active profit-taking while the dollar gains ground.

Traders await initial data on US crude inventories from the American Petroleum Institute, expected to show a decline for the second straight week.

Global Prices

US crude fell 0.4% to $81.83 a barrel, while Brent shed 0.5% to $86.51 a barrel.

On Monday, US crude rallied 1.45%, the fourth profit in a row, marking a four-month high at $82.46 a barrel, while Brent rallied 1.9% to $87.15, the highest since November 2023. 

The strong gains amid concerns about supply disruptions from Russia as Ukraine intensifies its bombardment of Russian energy infrastructure, and with hopes for improving Chinese demand after strong industrial production data.

The Dollar 

The dollar index rose 0.4% on Tuesday on track for the fourth straight profit, hitting a three-week high at 104.06 against a basket of major rivals.

A stronger dollar weighs on prices of greenback-denominated  commodities as they become costlier to holders of other currencies. 

Dollar’s gains come as US 10-year treasury yields rally as well ahead of the Federal Reserve’s policy decisions this week, expected to maintain interest rates unchanged at 2001 highs.

US Stocks

The American Petroleum Institute will release initial data on US crude stocks later today, expected to show a drawdown for the second week in a row.