During the Asian morning Thursday, the BoJ will announce its policy decision. With inflation still hovering near 0%, we doubt that the Bank will make any changes to its policy at this meeting, or send any hawkish signals like many of its foreign counterparts have done lately. Our view is enhanced by recent comments from Governor Kuroda that the Bank will maintain QQE with yield curve control until it achieves 2% inflation in a stable manner.
As for the yen, we view the risks surrounding its reaction from this meeting as being tilted to the downside. We see the case for the Bank to revise down its short-term inflation forecasts given that inflationary pressures remain subdued. Even though CPI inflation picked up a bit in recent months, both the headline and core rates still rest at +0.4% yoy, while forward-looking indicators like the Tokyo CPIs suggest inflation could slow again soon.
Looking ahead, we see the case for the yen to continue to underperform the likes of EUR, CAD and AUD. Under its current framework the BoJ is keeping yields on longer-dated JGBs fixed near 0%, while the ECB, the BoC, and the RBA have turned optimistic recently, pushing their respective yields higher.
However, we don’t expect the yen to underperform the US dollar in the near-term, given US political uncertainties and subdued expectations of further near-term Fed rate hikes. Having said that though, we think that USD/JPY could rebound in coming months, conditional upon US data picking up and markets repricing another Fed hike this year.
USD/JPY traded slightly lower yesterday, but hit support near 111.80 (S1) and then it rebounded somewhat. As long as the rate continues to trade below the short-term downtrend line taken from the peak of the 11th of July, and also below the longer-term downside resistance line drawn from the high of the 11th of January, we still see a negative short-term outlook. We would expect the bears to take charge again soon, perhaps near the 112.25 (R1) resistance, and drive the battle lower for another test at 111.80 (S1). A break below that level would confirm a forthcoming lower low on the 4-hour chart and is possible to aim for our next support of 111.45 (S2).
BoE rate hike bets fade after inflation slows
The UK’s CPI rates declined in June, data showed yesterday, against expectations of remaining unchanged. Even though both the headline and the core rates remain notably above the target, their decline eases some pressure on the BoE to raise rates in order to curb overshooting inflation. The result was a weaker sterling, which could remain on the back foot for a while, perhaps until tomorrow’s retail sales data are released.
GBP/USD fell on the data after it hit resistance slightly above 1.3115 (R2), breaking below 1.3060 (R1) to stop near the psychological round figure of 1.3000 (S1). Then, the rate rebounded somewhat. Given that the pair is now back below the 1.3060 (R1) key barrier, we believe that further setback may be on the cards, at least until the release of the UK retail sales tomorrow. We expect sellers to take the reins again soon and aim for another test near the 1.3000 (S1) zone. A dip below that level could initially aim for the 1.2975 (S2) barrier, marked by the inside swing peaks of the 6th and 7th of July. We should note though that Cable continues to trade above the longer-term upside support line drawn from the low of the 7th of October. This keeps the broader picture cautiously positive and thus, we would treat the latest slide, or any extensions of it, as a corrective phase.
Today’s highlights:
The European economic calendar is almost empty. From the US, we get building permits and housing starts, both for June. The forecast is for both figures to have risen from the previous month, which could reverse some of USD’s latest losses. From Canada, we get manufacturing sales for May and expectations are for a slowdown.
USD/JPY
Support: 111.80 (S1), 111.45 (S2), 111.00 (S3)
Resistance: 112.25 (R1), 112.85 (R2), 113.60 (R3)
GBP/USD
Support: 1.3000 (S1), 1.2975 (S2), 1.2920 (S3)
Resistance: 1.3060 (R1), 1.3115 (R2), 1.3180 (R3)
