Markets
The British pound unexpectedly took center stage yesterday. EUR/GBP declined sharply at the very start of the European open, temporarily breaking below key support at the 0.886 area. UK December inflation topped expectations but failed to explain the move from a timing-perspective. Moreover, with inflation still well below the BoE’s 2% target, it is unlikely to bring forward any policy normalization. Whatever the reason, the pair set an intraday low around 0.884, the strongest sterling level since May last year before reversing course even as BoE governor Bailey again voiced doubts on the effectiveness of negative rates. EUR/GBP eventually pared losses to close bang at the high-profile 0.886 area. The dollar remained in a weak spot yesterday but so did the euro. EUR/USD fell from an intraday high around 1.216 to 1.208 but closed just north of 1.21 in lockstep with the comeback in EUR/GBP. USD/JPY finished the session lower at 103.54 despite the risk-on environment (stocks up to 2% higher in the US). In his inauguration speech, Biden called for unity, equality and multilateralism. The president also urged Americans and lawmakers to support his agenda of economic and social relief. He signed a few executive orders already to signal a clean break with his predecessor by a.o. rejoining the Paris climate accord. His message didn’t really inspire investors, as shown by bond markets. US yields declined less than 1bp across the curve. German yields traded unchanged.
Asian markets trade with nice gains this morning. The Bank of Japan held policy rates stable (cf. infra) and the Australian December labour report was solid. Both the yen and the Aussie dollar gain vs. an overall heavy-trading greenback. EUR/USD tries to build on yesterday’s final-hour momentum and extends gains to 1.213. EUR/GBP again trades sub 0.886. Core bonds trade with a slight upward bias.
Today’s US housing data and weekly jobless claims will be overshadowed by the ECB policy meeting. We expect no changes after having seen the (end-of-cycle?) easing in December. Lagarde will face some questions whether the ECB is still worried about EUR/USD’s level even after the recent decline. Also yesterday’s Bloomberg report about (peripheral) yield curve control is likely to trigger questions from the audience. However, Lagarde will probably nip any speculation in the bud, meaning the market reaction might stay relatively muted, provided the ECB president doesn’t go off-script. Lagarde might keep a cautiously optimistic tone having in mind the vaccine rollout even as more countries extend lockdowns or other measures. This could add to a benign risk environment, supporting core bond yields and EUR/USD. We keep a very close eye at sterling, which is tentatively breaking below EUR/GBP 0.886 again, highlighting its recent positive momentum. From a technical perspective, we’d have to wait until this week’s close (with tomorrow’s retail sales and PMIs due) before drawing any major conclusions going forward.
News Headlines
The Bank of Japan left the short-term policy rate (-0.1%), the 10y-government bond yield target (0%) and its asset purchases unchanged. The central bank downwardly revised growth for the current fiscal year to -5.6%, but upgraded its outlook for next fiscal year from 3.6% to 3.9%, mainly based on supportive fiscal spending. The BoJ sounded more optimistic on capital spending and exports but warned for the strong downward pressure on services consumption. The yen (USD/JPY 103.40) strengthened this morning, but this is partly due to overall USD softness.
The Bank of Canada (BoC) left its policy rate unchanged at 0.25% and keeps QE running at least at C$ 4 bln/week.The BoC was upbeat over the medium term outlook. The economy is expected to expand 4% this year and about 5% next year. The BOC doesn’t expect a sustained return to the 2% inflation target before 2023. The Canadian dollar strengthened from the CAD/USD 1.27 area to the low 1.26 area after the decision. Governor Macklem signaled that a stronger Canadian dollar could become a headwind for the economy.
