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US economy set to slow in Q1, Bank of Japan stays easy

Japanese yen

After a choppy session yesterday, markets in Europe managed to finish the session in positive territory, however the gains were hard won, and lacked conviction.

In the US, the attempts to move higher were similarly lacking in conviction, with the best that can be said is that we’ve seen a little bit of a pause for breath after recent heavy declines, as we head towards the end of the week, and the month.

Today’s European open looks set to be a positive one after Facebook owner Meta Platforms Q1 numbers weren’t as bad as markets had feared, sending the shares higher after hours in what looks like a bit of a relief rally, while Asia markets have also moved higher on pledges of further fiscal support from Chinese policymakers. April has been a disappointing month for stock markets in general, but for US markets it’s been particularly bad, with the Nasdaq 100 hitting one-year lows yesterday, before managing to finish more or less unchanged.

The US dollar also went on another push to the upside, hitting a five-year high against a basket of currencies, and while the focus has been predominantly on the decline in the Japanese yen this month, attention is now turning towards the euro, after the single currency slipped below 1.0630 and its 2020 lows, raising the prospect of a move towards 1.0340, and a potential move towards parity. If this were to happen it would present an enormous challenge for the European Central Bank, who are trying to manage market expectations around possible rate hikes in the face of rising inflation.

The Bank of Japan is facing a similar problem of a weaker currency, although it doesn’t have the same inflation problem as the ECB. Nonetheless the decline in the Japanese yen does present a problem if only in the context of the speed of the move, down over 10% year to date. This morning’s Bank of Japan monetary policy meeting has seen the central bank keep policy unchanged and rather surprisingly reiterate that it expects “short-term and long-term policy rates to remain at their present, or lower levels”. Those last three words are key; the Bank of Japan is signalling in contrast to the US Federal Reserve that it has no intention of tightening policy at all, despite the sharp weakening of the yen so far this year and appear to be relaxed about the prospect of further declines. The BoJ also said it would carry out fixed rate bond buying every day to protect its 10 year yield target. This has the potential to open the way for a move through the 130.00 level towards 135.00 and the highs back in January 2002.

Today we get the first look at how the US economy has performed in Q1, against a backdrop of a resilient labour market, and lacklustre consumer confidence.  At the end of March US Q4 GDP got revised down from 7% to 6.9%, as revisions to consumer spending and fewer exports prompted a slight downgrade, however it was still a decent end to the year, however today’s first estimate for Q1 is likely to see a sharp slowdown.

In January, consumer spending started to pick up again, after slowing in December due to various covid related disruptions in the lead up to Christmas. We also saw a big boost to inventories in Q4 as retailers embarked on significant stock build ups to ensure they were well stocked to get ahead of pre-holiday supply chain problems. This is unlikely to be repeated during Q1, which is likely to exacerbate any slowdown, and though we saw a pickup in consumption spending in January, February and March saw a sharp slowdown in these levels.

The strength of the US dollar could well act as a drag on US export growth, while surging commodity prices could impact on demand. We’ve already seen the impact surging inflation has had on consumer confidence while the housing market is also slowing sharply. Expectations are for Q1 GDP to come in at 1%. Weekly jobless claims are expected to remain steady at 180k, while continuing claims are expected to fall below 1.4m. 

EUR/USD – has slipped below the March 2020 lows at 1.0635, and now looking to target a move towards the 2017 lows at 1.0340. The 1.0750 area now becomes resistance along with the 1.0820 area.   

GBP/USD – continues to close in on the 1 2490 area the 61.8% retracement of the move from the 2020 lows at 1.1410, to the peaks last year at 1.4240. Below 1.2480 targets 1.2250. We now have resistance at the 1.2820/30 area.

EUR/GBP – failed at the 0.8470/80 area yesterday, keeping the wider 0.8200/0.8500 range intact. Support comes in at the 0.8380 area.

USD/JPY – rebounded from the 126.90 area and looks to be heading towards the 130.00 area. The move through 129.40 has the potential to move through the 130.00 area, and on to 135.00. The main support lies all the way back down near the 124.70/80 area.

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