Daily Report: USDJPY pullsback overnight

The Asian session today mainly focused on the rumours that Japanese Prime Minister Shinzo Abe is considering a snap election and also deliberating as to whether to postpone or cancel altogether the rumoured sales tax increase for next year. Due to the lack of clarity regarding these issues during Asian trading, the JPY has recovered a chunk of its losses. This has included the USDJPY pulling back by as many as 100 pips, and further volatility in JPY pairs is expected while the markets await clarity on these issues.

The other major story as today’s European session opens is Brent Oil falling below $81 ($80.84) with further concerns over an oversupply of oil attracting investors’ attention. Later on Wednesday, it is widely expected US Oil Inventories data will be reported to have increased again, which will continue to elevate concerns over an oversupply of oil in the markets. Due to this, investors are already pricing in the move today.

Despite anxiety over the forthcoming EU GDP data release on Friday, the Eurodollar managed to record unexpected gains of 80 pips on Tuesday and closed just below 1.25 (1.2474). Already this morning, the Eurodollar is attempting to climb towards 1.25 once again, but seems to be finding resistance around 1.2490. The expectation for Wednesday’s EU industrial production is for another annualised decline, which would probably heighten expectations that the ECB are going to be forced to add further stimulus. What investors seem to be doing at the moment is pushing the EURUSD price as close to 1.25 and closing positions, before considering longer-term short options.

There is a chance of volatility for the Cable today due to a high quantity of market moving data regarding the UK scheduled for release. This includes UK Jobless Claims, Wage data and – the main event – the Bank of England (BoE) Inflation Report. Sterling bulls are likely to make some noise if average wage data improves again in October, but the downside risk is that Governor Carney could be about to throw cold water on those bulls remaining optimistic the BoE could raise rates as early as Spring 2015. If Carney declares that a UK rate rise is going to be delayed until later in 2015, Sterling bears are going to jump at the opportunity to push the Cable back down to 1.58.

It was during August’s BoE Inflation Report that Governor Carney inspired the GBPUSD downturn from 1.71 to 1.58 following his comments over “UK rate rises being gradual and limited due to global economic headwinds elsewhere”, and the economic sentiment in Europe, the UK’s main trading partner, has deteriorated substantially since then. Not only is the EU economic situation a concern for the BoE, but the Bank has always possessed strong views on weak price pressures (inflation) and UK CPI is expected to continue drifting lower as soon as next week. It will be interesting to see Carney’s reaction to not only UK inflation declining, but the UK economy showing increased signs of losing momentum as well.

Another aspect of the BoE inflation report that investors should look out for is Carney’s view on the UK election next May. Additionally, there are expectations that the BoE are not only likely to downgrade future inflation expectations, but also economic growth. If this materializes, investor attraction to the Sterling would be expected to weaken.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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