The upside in EUR/USD has become more limited
Bond yields on both sides of the Atlantic rose a few basis points before being halted by separate news reports. The culprit in the United States was a terrible Empire manufacturing, which fell to its lowest level since mid-2020 due to a drop in new orders and stalled hiring. US short-term yields finished the day 2-2.8 basis points lower.
Yields at the long end of the curve returned to intraday lows following the release, but eventually closed 4 to 5 basis points higher. On European soil, a Bloomberg story was responsible for German yields falling between 5.6 basis points (30y) and 10.9 basis points (2y), outperforming swaps by 1 to 2 basis points. According to news agency sources, ECB policymakers are considering a slower pace of rate hikes beginning with the March meeting.
A 50 basis point move in February is still considered most likely. They added that a slowdown in tightening should not be interpreted as the ECB abandoning its mandate. However, if that is the case, it is a less hawkish stance than President Lagarde outlined at the December meeting.
The euro paid in cash. The EUR/USD retreated from recent highs around 1.087 and fell to 1.078, even as the dollar itself traded unconvincingly. The DXY (trade-weighted dollar) continued to fall, but only so far. The EUR/GBP fell below 0.88, with a smidgeon of sterling strength present. It came after a solid labour market report, with near-record wage growth, keeping the pressure on the Bank of England.
This morning, the Bank of Japan held a closely watched meeting, but the mountain produced a mouse. It held rates steady at -0.1% and adhered to its YCC programme, which kept the 10y fixed at 0% with a 50 bps range. Given the ongoing inflationary and market pressures, some expected the BoJ to widen the allowed deviation even further.
The Bank of Japan raised its inflation forecast for the end of the horizon to 1.8%, with risks tilted to the upside, but clearly considered it insufficient for further policy changes.
As bets on a hawkish twist unwind, the yen takes a beating. The USD/JPY has risen from 128.12 to 130.75. However, Japanese equities are the standout performer, accounting for 2.5% of the total.
Bond yields in the area are down 4-11.1 basis points, with the 10-year yield leading the way. Moves spread to US Treasuries. Cash yields fall by 2.7-6.6 basis points.
Retail sales in the United States are due later today. They are expected to have fallen further m/m in December. Given yesterday's disappointing Empire manufacturing and general sentiment vs central banks following the ECB and BoJ news, there's probably more room for a US/core bond yield reaction in the event of a negative surprise.
In such a case, the dollar could remain under pressure, but with yesterday's Bloomberg story, EUR/upside USD's became more limited. 1.0942 became more powerful as a resistance. Following a CPI beat, the pound has extended its gains this morning.
Although headline inflation fell from 10.7% to 10.5%, monthly dynamics were stronger than expected (0.4% m/m vs 0.3%). Furthermore, core price growth remained stable at 6.3%, defying expectations for a drop to 6.2%. EUR/GBP falls towards 0.8769. The first significant support comes in at 0.8721.
Headlines in the News
At the World Economic Forum in Davos, IMF deputy managing director Gopinath subtly changed the organization's rather pessimistic outlook.
In a recent speech in New York, IMF managing director Georgieva warned that a third of the global economy will be in recession this year, calling 2023 a "tougher" year than 2022.
Gopinath continued to refer to the year as "tough," with inflation remaining too high and central banks remaining on course with interest rates to combat the problem, but she also emphasised an expected improvement in the second half of the year, stretching into 2024.
Lower energy prices and the reopening of the Chinese economy triggered an extremely bullish start to the year, with markets split on the central bank part of the story. In an interview with Bloomberg, German Chancellor Scholz expressed optimism by declaring that Germany will enter a recession.
In a statement, Slovakia's interim Prime Minister Heger stated that snap elections in the fall appear to be the most realistic scenario at the moment. Regular elections were set for February 20, 2024. Heger's administration fell apart in December. Attempts to gain a majority since losing the no-confidence vote have failed: "With today, I consider all attempts to establish a new 76 (majority) to be closed," he said. To call snap elections, parliament's term must be reduced, which could happen at next week's opening session (Jan 24).