BoJ Stands Pat, Pound Sterling Awaits U.K. Inflation Data
JFD Team | Jan 18, 2022 04:25AM ET
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 remaining 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 pound sterling traders will pay more attention to the UK CPI scheduled for tomorrow.
h2 Sentiment Softens Tuesday as Us Treasury Yields Jump/h2The 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 USD.
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, to clear things up regarding 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’s remarks by Fed Board Governor Waller. Note that US markets stayed closed yesterday to celebrate Martin Luther King Jr. Day.
Waller said he was not thinking about a 50 bp 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 now? Just for the record, Hedge fund manager Bill Ackman said on Sunday that the Fed needs to deliver that double hike to restore its credibility.
The next Fed gathering is scheduled for Jan. 25 and 26, 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.
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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 divergences 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 aggressively 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.
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 Jan. 12. However, despite the slide, in the bigger picture, the index is trading above an upside support line drawn from the low of Nov. 30. In our view, this keeps the door for a potential rebound wide open.
If the bulls are strong enough to retake charge from near that line, we would expect them to target the 28450 barrier initially, and then the 28800 zone. If they are unwilling to stop there, we could see them climbing towards the 29200 territory, marked by the peak of Dec. 16, and some intraday swing lows formed on Jan. 4 and 5.
We will start examining the bearish case upon a break below 27900, an area marked as a support by the lows of Jan. 10 and 14. Such a break would confirm a forthcoming lower low on the daily chart and may allow declines towards the low of Dec. 3, at 27570. A break lower could extend the slide towards the lows of Nov. 30 and Dec. 1, at around 27380.
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 fewer 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 is 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 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 Dec. 31. Overall, the pair has been oscillating between that barrier and the support of 0.8325 since Jan. 4, 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 Feb. 18.
On the upside, a break above the range’s upper end, at 0.8370, would confirm a forthcoming higher high. However, 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 Dec. 8.
We could see a correction towards the 0.8394 level, marked by the high of Jan. 4, where a break could target the aforementioned downside line, or the 0.8418 zone, marked by the high of the day before.
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 EUR 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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