JPY resurgence continues

In comparison with Tuesday’s global sell-off, trading on Wednesday has been much calmer. The major story for the currency markets has been the resurgence in JPY demand, with the USDJPY continuing to pullback on Wednesday. The announcement overnight that China inflation levels fell to a five-year low added to further concerns that economic momentum for the world’s second largest economy is slowing down. It is clear that fears of an economic slowdown in China is having a knock-on effect on the JPY. When fears over the Chinese economy arise, traders more likely than not to seek the safe-haven support of the JPY.

Since the USDJPY progressed to a new seven-year high on Monday morning at 121.838, the pair has pulled all the way back to trade as low as 117.948. The USDJPY is continuing to come under pressure on Wednesday afternoon, but finding support around 119.250 preventing downside moves towards the 118.677 support level. Unless the USD continues its recent softness, I think the momentum in this pullback is starting to slow down. Any unexpected action from the People’s Bank of China (PBoC) or a disappointing reaction to the overnight New Yuan Loans release could reignite the JPY bulls. Other than that, investors are aware Japan is holding a snap election on the 14th December, with this preventing further JPY purchasing.

Elsewhere, the USD is slowly attempting to rebound away from Tuesday’s losses recording gains against commodities such as Oil and Gold today. After suddenly appreciating to $1238 from $1199 yesterday, Gold has slipped to find support around $1230 on Wednesday. There is still some talk regarding the metal reaching $1250, but resistance at $1235 needs to be overcome first.

In regards to Crude Oil, the commodity has felt pressure today with the price dropping back down to $62.30. The appreciation we noticed yesterday was nothing other than a reaction to USD weakness. Further USD weakness, or signals of monetary easing from the PBoC would be required to provide Oil bulls with a boost.

After rising to 1.2393 earlier in trading the EURUSD fell back to 1.2361 following disappointing Industrial Output data from France. The unexpected monthly 0.8% decline was just a reminder to the markets that the French economy remains in trouble. The comments from European Central Bank (ECB) Chief Economist Peter Praet that EU inflation levels are likely to point towards zero now commodity prices have declined dramatically, was another reminder to investors that although the Euro is benefiting from the ECB leaving monetary policy unchanged, the longer-term outlook for the currency remains firmly to the downside.

In line with expectations, the Pound was supported when the UK Trade Balance was announced as having dropped to a seven-month low earlier in the session. The majority of the news was priced into the markets, but the GBPUSD did manage to progress as high as 1.57. Cable is now consolidating just below this level, with the pair pressured by the expectation that any UK interest rate increases will be gradual according to Bank of England Governor Mark Carney’s repeated statements suggesting as much.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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