Written by Convera’s Market Insights Team
BoJ to end negative policy in Q2?
Boris Kovacevic – Global Macro Strategist
The Bank of Japan met for the first time this year and began the monetary policy year without giving investors any hints about when a supposable interest rate increase might come. Policy makers left the benchmark rate steady at -0.1% and kept the yield curve control parameters intact at the end of a two-day meeting. Inflation has been above target fore almost a year now and the central bank is not expecting a return to 2% this year.
This does suggest an exit from the last negative rates regime in the world but leaves us guessing about the timing. Without any aggressive hawkish rhetoric, action in Q1 seems unlikely, with surveyed economist from Bloomberg seeing April as the most likely month for the rate hike. The Japanese equity benchmark Nikkei reached another record high and is on track to record its fourth consecutive weekly rise (+10%). USD/JPY had appreciated for three weeks in a row but is now pushing lower after failing to break through the 149¥ level.
With a lack of headlines and macro releases on both sides of the Atlantic, price action has been governed by events in Asia. Reports on Chinese sate-owned banks supporting the yuan via tighter liquidity and by selling US dollars has somewhat stabilized USD/CNY at 7.16¥. The currency pair has appreciated by around 10% last year and is trading close to the top of its 15-year range. Beijing’s state interventions is a clear sign of policy makers uneasiness with the depreciation of the yuan and the current negative sentiment in markets, which saw the Chinese equity benchmark CSI 300 lose around 44% of its value since 2021.
EUR steadies at $1.09
Ruta Prieskienyte – FX Strategist
FX markets started the week in quiet fashion. Euro remained largely unchanged against the US dollar around $1.0880, remaining close to its weakest level since mid-December. Meanwhile, EUR/GBP declined to a fresh 4-month low and is currently trading -1.4% YTD, in what is the worst start to the year performance in the post pandemic era. Looking at other European markets, Frankfurt’s DAX 40 surged by 0.8%, touching its highest level since January 12th, primarily fuelled by notable gains in the tech sector and the German 10-year Bund yield dipped below 2.3% as all eyes are now focused on the European Central Bank’s (ECB) upcoming interest rate decision on Thursday.
It is widely expected that the ECB policymakers will maintain interest rates at their current record-high levels, while investors are keenly focused on any potential insights the central bank might provide regarding the timing of interest rate cuts. Last week, a series of hawkish comments from ECB officials tempered expectations of an early rate cut, leading markets to price in approximately 130bps (-20bps w/w) of rate cuts from the ECB this year. Meanwhile, the December meeting minutes from the ECB revealed officials’ confidence in inflation returning to the target but underscored the need to maintain a restrictive stance for some time, reflecting differing views on the timing of achieving that target. The President Christine Lagarde noted that the central bank’s first-rate cuts are likely due in the summer, adding that more evidence of disinflation is needed to warrant looser monetary policy. A Governing Council member Knot also stated that markets have overestimated the extent of projected rate cuts, allowing for financial conditions to unintentionally loosen and risking the necessity of a hawkish response from the central bank.
Outside of the ECB meeting, investors will be eyeing the latest flash consumer confidence and ECB bank lending survey later today and the flash PMIs for January on Wednesday. These latter two data sets had weighed quite heavily on the euro last autumn/winter and will be closely watched ahead of the Governing Council meeting. For now, EUR/USD looks set to move sideways as it awaits the next catalyst and remains range bound in a tight trading channel of $1.0844 – $1.0920.
Pound rises on lack of news
Boris Kovacevic – Global Macro Strategist
The news flow in the United Kingdom focused on political events amid the lack of clear macro drivers. The US and UK launched new airstrikes against Houthi targets in Yemen on Monday. At the same time, lawmakers in the House of Lords voted to delay the controversial plan to send migrants to Rwanda, splitting the conservative party into two opposing camps. Politics did little to move the pound, though. And with a slight hint of risk-on taking over this morning against the backdrop of China announcing new stimulus measures on the policy front, GBP/USD continued trending higher.
The currency pair has been anchored to the $1.27 level for six weeks now with no immediate impetus to break out of its incredibly tight range between $1.2600 and $1.2820. Tomorrow’s UK purchasing manager index could drive FX price action as the composite index is expected to marginally increase from 52.1 to 52.2 in January. This would constitute the third positive reading in a row on the back of a strong services sector. Apart from the GfK consumer confidence number on Friday, investors will focus their attention on events in the Eurozone and US, which will dominate the narrative this week.
Key global risk events
Calendar: January 22 – 26
Pound anchored at $1.27
Table: 7-day currency trends and trading ranges
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
