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Jan 17 - 03:55 PM

EUR/USD - COMMENT-US Recap: EUR/USD Slide On ECB Story Steals Spotlight From BOJ

By Randolph Donney  —  Jan 17 - 01:55 PM

EUR/USD fell 0.3% Tuesday after a media report that the ECB might slow the pace of interest rate hikes after their February meeting nL4N3423H8, sparking a sharp drop in euro zone yields nL1N3420QA and broad euro weakness.

Two-year bund yields fell 11.6bp, led by lower rate hike pricing in the latter half of this year.

The drop may have been enhanced by dovish interpretations of comments made by ECB chief economist Philip Lane nL1N342096 and on broader hopes worst-case energy crisis scenarios stemming from Russia's war in Ukraine have been averted.
But averting those risks and hopes China's reopening will disproportionately benefit European businesses had also recently been viewed as supporting EUR/USD.

EUR/USD's 1.0870 high on EBS Tuesday by the preceding three days' highs came after extremely weak New York Fed manufacturing data nL1N34214U pulled Fed hike expectations and Treasury yields lower.

But the market's main focus remains Wednesday's BoJ meeting outcome and whether it will further reduce its restraints on rising JGB yields that could trigger a fresh wave of yen buying nL1N34214U.
USD/JPY fell 0.14% after making a 127.99 low on EBS and above key 126.56 chart support.

With Japanese inflation persistently above the BoJ's 2% target and staggering amounts of QE still unable to keep JGB yields below the 10-year yield cap raised in December nL1N34214U, a further rate cap rise is likely.

If the BoJ delays substantial yield curve control adjustments and USD/JPY holds major support at 126.56 on the initial test, there could be a corrective rebound to sell, but it will take much stronger-than-expected U.S. data and Fed rate hike pricing to deter a broader unwinding of the 2020-22 uptrend.

Sterling rose 0.54%, initially on above-forecast UK wage growth and employment nL8N3421P9 and then to its 1.2300 top on weak U.S. data.

The yuan fell 0.45% as the economic costs of China's now abandoned zero-COVID policy were highlighted by one of the worst yearly GDP reports on record nL1N34202H, tumbling property sector data nK7N33D00L and the first population drop in six decades nL1N34202E.

Wednesday features U.S. retail sales, producer prices, industrial production and NAHB releases.

For more click on FXBUZ

Refinitiv IFR Research/Market Commentary


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