Later this week, the Bank of Japan (BoJ) and the European Central Bank (ECB) will both hold their first monetary policy meetings of the year.
In previous FX Updates, we have emphasised the significance of Central Bank interest rate policy divergence as a key driver in foreign exchange trends over the past two years.
More specifically, the USD has appreciated versus its G-7 peers during periods when US growth and interest rate expectations have diverged higher relative to other economies.
In front of Wednesday’s BoJ and ECB meeting, it’s worth reflecting on some recent macro-economic data.
Last month’s US industrial production data reported almost 4% growth on a year-on-year basis. For the Eurozone, that same measure showed a contraction of 1.5%, while Japanese overall output grew at 1.7%.
Considering the weakness in some of the broader high frequency data over the last few weeks, there is a strong possibility that the growth divergence narrative could push even wider after the BoJ and ECB meetings.
Since the last ECB meeting in December, the Eurozone composite PMIs have extended their four-month contraction. And while it’s convenient for EU policy makers to point to trade tensions as the major headwind to the manufacturing sector, the ongoing softness in services PMIs suggest the ECB benchmark overnight rate will remain at -40 basis points well into H2 2019.
In his post-meeting press conference, we expect ECB chief Mario Draghi to lean heavily on the slight improvements in this month’s EU employment data as a precursor to further growth in the general economy. We see this more as wishful thinking than an actual policy directive.
We are currently short the EUR/USD from 1.1465. We suggest adding to short positions at 1.1425 with an initial target of 1.1225 and a 1.1535 stop.
Last week’s Japanese inflation data extended the protracted slide in both food and energy prices over the last 12 months. The key BoJ PPI measure fell from .9% to .7%, well below the BoJ’s target of 2.0%. There have been some reports that the central bank may adjust their inflation target lower, which would be a dovish signal to Forex traders.
The USD/JPY reached a two-week high of 109.90 going into the weekend and the technical picture is looking constructive for further gains to start the week. The pair has not posted a NY close above the 30-day moving average since December 14th, that level is currently at 110.40.
Our trade suggestion to buy USD/JPY at 106.35 was not filled, which leaves us flat. We suggest short-term traders look to sell USD/JPY at 110.60 with an initial target of 107.75 and a 111.55 stop.
The Sterling posted a 2-month high near 1.3000 during Friday’s London session before reversing sharply lower to settle into the weekend just above 1.2850. PM May will submit a revised version of the Withdraw Bill later today but it’s not scheduled for a vote until next Wednesday.
We are currently flat the GBP/USD and suggest short-term traders can look to sell the pair at 1.2880, with an initial target of 1.2640 and a 1.2975 stop.
The two-week recovery in the Aussie Dollar from the January 2 low of .6740 looks to have run its course. Upside momentum has been rejected twice near .7235. Both the MACDs and Slow Stochastics are rolling over with the daily RSI just above 50.00 and pointing lower.
The AUD/USD could consolidate above .7150 in front of Thursday’s employment report, but a break below .7140 would likely trigger range extension selling back below .7100. Our trade suggestion to add to short positions at .7190 was filled, which lifts our average price to .7155.
We suggest holding short from .7155, or better, with an initial target of .6865 and a .7290 stop
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