Sterling rose in European trade against a basket of major rivals, extending gains against the yen for the seventh straight session and scaling a nine-year peak amid renewed concerns about the widening UK-Japan interest rate gap.

Even as inflationary pressures retreat on Bank of England’s policymakers, there remains doubts about the prospects of cutting UK interest rates in June. 

Conversely, the Bank of Japan raised mainline interest rates for the first time since 2007, while still maintaining accommodative policy tools for the time being. 

GBP/JPY

GBP/USD rose 0.5% to 192.85, the highest since August 2015, with a session-low at 191.77, after rising 1.05% yesterday, the sixth profit in a row, and the largest since January 3 following bearish remarks by the BOJ following its policy decisions. 

Bank of England 

Even as inflation plumbs three-year lows in February, it’s still far from the 2% official target.

Thus it’s likely that the Bank of England will be slower in cutting interest rates this years compared to the US and Europe. 

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 UK-Japan interest rate gap stands at 515 basis points in favor of the UK, and is expected to remain thus for a long duration this year, in turn boosting the pound.  

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.