In the past few months traders and investors' attention has been primarily focused on the European Central Bank, as well as the US Federal Reserve, in terms of the timing of the next significant change in policy.
In particular, the rise in the euro in the past 12 months had been predicated on the assumption that the ECB’s bond buying programme had an inbuilt sell-by date in terms of longevity.
Away from these two it was widely assumed that the Bank of Japan was unlikely to be moving in the same direction and if it was, on nowhere the same sort of time line, so it was with some surprise that yesterday’s $10bn reduction to the Japanese central banks monthly bond buying programme was so unexpected.
While some have speculated that yesterday’s move was only a technical change the move sent a ripple through the bond markets, pushing yields up on US treasuries and other bond markets as traders and investors re-adjusted their positions amidst a worry that they might be underestimating the pace at which central banks might look to withdraw stimulus in the coming months.
The move has also brought the Bank of Japan into play in terms of speculating on what, if any there next policy move is likely to be, and while the Nikkei 225 made a new 26 year high this week, a stronger yen is unlikely to be welcomed by Japanese exporters.
A rise in inflationary pressure could well be one just catalyst that causes a faster than expected reaction from central banks and while prices in the US and Europe remain benign for the moment, the continued rise in commodity prices over the past few months could throw a wrench into the gears of the global economy. Brent crude prices are back near $70 a barrel which equates to a rise in excess of 45% since last summer, something that could come out in the wash later this year.
In any event yesterday’s move didn’t impact UK and US equity markets with the FTSE100 closing at a record high, while US markets continued their march onwards to new records with the S&P500 posting its best start to a year since 1987. The index has finished in positive territory every day this year, with financials and retail stocks helping drive the gains ahead of the latest bank earnings announcements which are due out at the end of the week.
European markets also finished the day higher yesterday with the DAX inching closer to its record highs of last year, while the French CAC40 made its highest daily close in 10 years. This enthusiasm was not matched by markets in Asia where the ripple effects of yesterday’s move by the Bank of Japan were still being digested by investors there, and this is likely to be reflected in this morning’s European open.
It’s an important day for UK data today with the latest manufacturing and industrial production data for November due out later this morning.
Manufacturing has been a standout performer for the UK in Q4, if various independent surveys are to be believed, so it would be a surprise if today’s ONS announcements don’t confirm that picture.
Expectations are for a rise of 0.3% for both manufacturing and industrial production, both significant improvements on the October numbers, while the latest trade balance data is expected to show a deficit of £1.5bn.
The latest NIESR GDP estimate for December is also expected to paint a positive picture of 0.5% growth for Q4, as economic data continues to surprise to the upside.
EUR/USD – continues to edge lower with 1.1850 the next key support now that we’ve slipped below 1.1950. The failure to overcome the highs of last year at 1.2095, could be a catalyst for further declines towards 1.1600. Above 1.2100 argues for a move towards 1.2170 which is 50% retracement of the 1.3995/1.0340 down move.
GBP/USD – still finding support at the 1.3500 area so far this year but needs to push beyond the highs of last year at 1.3660. While it struggles to do so the pound remains vulnerable to a decline back to the 1.3300 area. We also have interim support at the 1.3450 area. A move beyond the 1.3700 area argues for a move towards the 1.3830 level and February 2016 pre Brexit vote lows.
EUR/GBP – remains under pressure after last week’s failure to overcome the 0.8925 area and 100 day MA, and has continued to slip back with the prospect we could see a move towards key support back at the 0.8740 area, with a close below targeting a move towards 0.8650.
USD/JPY – has remained under pressure after the failure to overcome the 113.40 area which was trend line resistance from the November highs. To target those highs at 114.50 we need to push through the 113.60 area. We could slip back to support at the 112.00 area, which are one month lows.
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