BoJ Stands Pat, GBP-Trades Await the UK Inflation Data
Market sentiment softened during the Asian session today, perhaps due to a jump in US Treasury yields at today’s open, as US markets stayed closed yesterday. We also had a BoJ decision, with the Bank staying sidelined and upgrading its economic projections as expected. A few hours later, we also got the UK employment report for November, but we believe that GBP-traders will pay more attention to the UK CPIs scheduled for tomorrow.
SENTIMENT SOFTENS TUESDAY AS US TREASURY YIELDS JUMP
The US dollar traded higher against all but two of the other G10 currencies on Monday and during the Asian session Tuesday. It gained the most versus NZD, JPY, and GBP in that order, while it underperformed versus NOK and CAD.
The strengthening of the US dollar suggests a risk-off trading environment, but the weakening of the yen, combined with the strengthening of the Loonie, points otherwise. Therefore, in order to clear things up with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, we see that major EU indices traded in the green, perhaps due to the better-than-expected Chinese data released during the Asian session Monday, as well as due to the PBOC’s unexpected decision to cut the borrowing costs of its medium-term loans for the first time since April 2020. However, sentiment deteriorated during the Asian session today. Perhaps the reason was the sudden jump in US Treasury yields at today’s open following last week remarks by Fed Board Governor Waller. Note that US markets stayed closed yesterday in celebration of the Martin Luther King Jr. Day. Waller said that he was not thinking about a 50bp hike in March, but his comments may have put the idea on some investors’ minds. It’s like telling you not to think of a white bear. What are you thinking right know? Just for the record, Hedge fund manager Bill Ackman said on Sunday that the Fed needs to deliver that double hike in order to restore its credibility. The next Fed gathering is scheduled for January 25th and 26th, and it’s the one just before the March meeting. Thus, we will closely monitor the outcome for clues and hints on whether and how policymakers are thinking to act in March.
BOJ STANDS PAT, STRESSING WILLINGNESS TO STAY ULTRA-LOOSE
Today, during the Asian session, the BoJ decided on its monetary policy, and as was broadly expected, it kept all its policy tools untouched, and upgraded its economic projections. However, although officials revised up their inflation forecasts, they said that they expect inflation to stay below their 2% target in the coming years, and added that they will maintain ultra-loose monetary policy even as their global counterparts have already started exiting covid-related policies. This means that the yen may have a disadvantage due to monetary policy divergencies between the BoJ and other major central banks, and may come under renewed selling interest soon. Something like that could help Japan’s equity market to rebound as well. However, we don’t believe that the upside trajectory will be a path full of rose pedals. After all, both the yen and Japanese equities are sensitive to developments surrounding the Fed’s future plans as well. Let’s not forget that the US is the world’s largest economy and the US dollar the world’s reserve currency. Anything suggesting that the Fed may proceed more aggressive than currently thought could hurt the broader market sentiment, resulting in a pullback in global equities, and a rebound in the yen. With the US dollar expected to strengthen as well in such case, we believe that USD/JPY may be a better choice for exploiting an uptrend, rather than EUR/JPY, as the ECB is more likely to refrain from hiking interest rates this year.
NIKKEI 225 — TECHNICAL OUTLOOK
The Nikkei 225 cash index traded lower during the Asian session today, after it hit resistance slightly below the 28800 barrier, marked by the high of January 12th. However, despite the slide, in the bigger picture, the index is trading above an upside support line drawn from the low of November 30th. In our view, this keeps the door for a potential rebound wide open.
If the bulls are strong enough to take charge again from near that line, we would expect them to initially target the 28450 barrier, and then the 28800 zone. If they are not willing to stop there, we could see them climbing towards the 29200 territory, marked by the peak of December 16th, and some intraday swing lows formed on January 4th and 5th.
We will start examining the bearish case upon a break below 27900, an area marked as a support by the lows of January 10th and 14th. Such a break would confirm a forthcoming lower low on the daily chart and may allow declines towards the low of December 3rd, at 27570. A break lower could extend the slide towards the lows of November 30th and December 1st, at around 27380.
UK DATA TO ADD CREDENCE TO BOE HIKE
A few hours later, we got the UK employment report for November. The unemployment rate ticked down to 4.1% from 4.2%, but the net change in employment showed that the economy added less jobs than expected in the three months to November, than in the three months to October. Average weekly earnings, both including and excluding bonuses, slowed as expected. Although this could suggest that inflation may start easing in the months to come, we don’t expect market participants to change their bets around the BoE’s policy plans. The reason is that tomorrow, during the early morning again, we get the UK CPIs for December, which are more recent data, and the forecasts suggest that headline inflation may have continued to accelerate in the last month of 2021. This could add more credence to market participants’ view that the BoE will hit the hike button again at its upcoming gathering, and may bring the pound under renewed buying interest.
EUR/GBP — TECHNICAL OUTLOOK
EUR/GBP turned down today, after hitting resistance slightly below the 0.8370 zone, marked by the peaks of January 5th and 6th, as well as by the inside swing low of December 31st. Overall, the pair has been oscillating between that barrier and the support of 0.8325 since January 4th, and thus, we will consider the short-term outlook to be neutral for now.
In order to start examining the bearish case, we would like to see a clear dip below the lower end of the aforementioned range, at 0.8325. This will confirm a forthcoming lower low and may initially target the 0.8300 zone, the break of which could carry extensions towards the 0.8280 territory, defined as a support by the low of February 18th.
On the upside, a break above the range’s upper end, at 0.8370, would confirm a forthcoming higher high, but it may be too early to start examining a potential bullish reversal, as the rate would still be trading below the downside resistance line drawn from the high of December 8th. We could just see a correction towards the 0.8394 level, marked by the high of January 4th, where a break could target the aforementioned downside line, or the 0.8418 zone, marked by the high of the day before.
AS FOR THE REST OF TODAY’S EVENTS
From Germany, we get the ZEW survey for January, with the current conditions index expected to have ticked down to -7.5 from -7.4. However, the economic sentiment one is anticipated to have increased to 32.7 from 26.8. This means that analysts see improvement for Eurozone’s growth engine in the next six months, and thus, the euro may receive a small boost at the time of the release. However, we don’t expect a huge reaction and the reason is that such numbers are unlikely to prompt participants to massively add to bets over a rate hike by the ECB this year. Remember that last week, ECB Chief Economist Philip Lane said that they do not see Eurozone inflation above 2% in the medium term, despite rising to 5% in December, which means that they are sticking to their view of no hikes this year.
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