Recently not much happened in the USD/JPY cross rate. Trading was confined to the 79.00 big figure, mostly with a cautiously negative bias. Global sentiment on risk remained fragile and core (US) bond yields were again on a downward path, reducing the incentive to look for yield pick-up from trades funded in the Japanese currency. Yesterday’s poor US retails sales pushed USD/JPY out of the 79.00 sideways trading range. Looking forward, the pressure on USD/JPY might remain to the downside and might even intensify. Poor US eco data and speculation on more QE will probably keep US bond yields under downward pressure short-term.
On the yen side of the story, the BOJ will probably maintain a wait-and-see approach as recent data from the Japanese domestic economy weren’t that bad. In this context, the upside in USD/JPY will remain difficult. This morning, Japanese policy makers warned that the current strength of the yen is not in line with fundamentals and indicated that they might take measures. However, we don’t expect that to happen anytime soon. On Monday, sterling initially continued its strong performance of the end of last week. There were no important eco data on the calendar in the UK trading was mostly technical in nature. EUR/USD and cable lost some ground early in the session, but cable still outperformed EUR/USD. So, EUR/GBP continued to set new lows against the single currency. This move was temporary interrupted as there was quite sharp repositioning/rebound in EUR/USD after the US retail sales. However, cable succeeded a catch-up move later in the session. EUR/GBP set a new correction low in the 0.7832 area. Of course, this was in the first place a dollar move rather than sterling or a euro move. In technical trade, EUR/GBP regained some ground later in the session. The pair closed at 0.7849, still a bit lower from the 0.7865 close on Friday evening.
Today, the UK calendar contains the ONS house prices and the CPI. The CPI is interesting. However, as the BoE has as already set out the framework for the next four months, the market reaction should be subdued. So, technical considerations will continue to play an important role. Of late, cable clearly outperformed EUR/USD. The UK currency also profited more from the improved sentiment on risk than EUR/USD. In case of any reaction to the testimony of Bernanke before the Senate, this will in the first place be a dollar move. However, we look out whether the outperformance of cable will continue. In case of global market repositioning, the euro might be more ‘vulnerable’ to a correction/short squeeze than cable. If so, the decline of EUR/GBP might take a breather. We look out how this process turns out, but for now this is nothing more than hypothetical thinking.