The Bank of England (BoE), European Central Bank (ECB) and most recently, the US Federal Reserve, have all issued their most recent monetary policy statements in the past two weeks. All of these three major central banks opted for inaction – the BoE and ECB refrained from implementing post-Brexit stimulus measures for the time being while the Fed again deferred a long-postponed rate hike. Friday finally brings the Bank of Japan’s (BoJ) highly-anticipated policy statement, which will most likely buck this recent trend of inaction.
On Wednesday, Japanese Prime Minister Shinzo Abe revealed an unexpectedly sizable 28 trillion yen government stimulus package, which placed immediate pressure on the BoJ to follow suit by expanding its stimulus program. The key question weighing now on the global markets, and the yen in particular, is the extent to which the central bank will cooperate with Abe’s aims to boost Japanese economic growth.
Most analysts expect some form of stimulus from the central bank, including possible asset purchases and/or a further interest rate cut, but the uncertainty lies in the magnitude of these actions. This magnitude will likely serve as one of the main drivers of market movement on Friday and into next week for both the Japanese yen and major equity markets. Of course, in the very unlikely event that there is no BoJ action at all, volatility in the markets should be particularly pronounced, potentially leading to a dramatic surge for the yen.
As usual, USD/JPY will be one to watch, as it can serve as a good barometer of yen movement. Another key currency pair that should also see high volatility during this event, however, will be EUR/JPY, especially since Friday also brings a solid series of European economic data.
In the event of more comprehensive stimulus than expected from the BoJ on Friday, the yen will likely be pressured to retreat sharply, pushing EUR/JPY to rise and extend its rebound from recent multi-year lows. In the opposite event of a substantially lighter stimulus package that disappoints Abe and other Japanese government officials, the yen could resume its longer-term strengthening, potentially pressuring EUR/JPY to continue its downtrend of the past year.
This EUR/JPY downtrend is clearly framed by two key trend lines that have shown an acceleration of the bearish trend this year. Most recently, the currency pair established a post-Brexit multi-year low around 109.50 in late June. This was followed by a rebound within the past three weeks that boosted EUR/JPY up to a key 61.8% Fibonacci retracement level before falling back.
Currently, in the immediate run-up to the BoJ policy statement, the currency pair is bumped up against its 50-day moving average to the upside. To the downside is the major 115.00 support level. Depending on the outcome of the policy statement, any surprise could likely lead to a breakout price move. With less-than-expected stimulus, EUR/JPY could break down below 115.00, which could put it on track to target downside support around 111.00, followed by a potential resumption of the entrenched bearish trend. With more-than-expected stimulus, EUR/JPY could rise above its 50-day moving average, in which case, the next major resistance targets are around the 119.00 level, followed further to the upside by the noted accelerated downtrend line.
Figures from the UK national statistics agency announced yesterday showed that consumer price index (CPI) of UK in June rose 0.5% compared with the same period last year, higher than the increase forecast of 0.4% and the rise of 0.3% in the previous month. Core inflation, excluding energy and food prices, rose from 1.3% to 1.4% over the same period last year.
Positive inflation data did not bring more support to Pound after the International Monetary Fund (IMF) sharply lowered its growth forecast for the UK economy. According to the IMF, Brexit would make the growth of UK fell by nearly 1% in 2017 from the forecast of 2.2% to 1.3%. The agency also stressed that increasing instability following the referendum in the UK forecasts domestic demand weakened significantly. British Pound was under pressure after credit rating agency Moody's warned the UK's economic growth will slow significantly in the short term. Prospects for growth in the medium term will continue to weaken if UK doesn't reach a trade agreement with EU in the case of this country officially out of the coalition.
EUR/USD fell back yesterday 1.10 threshold after the economic sentiment index by ZEW's survey of the German economic prospects in the next 6 months dropped from 19.2 points to minus 6.8, lower than the forecast of analysts at 8.2. Indicators on the Eurozone also fell from 20.2 to minus 14.7 over the forecast of 12.3. ZEW survey showed investors and economists are pessimistic about the prospects of Eurozone after Brexit.
The market's attention focus on the results of the meeting of the European Central Bank (ECB) launched tomorrow. Analysts predict ECB will not have any change of policy in this session. However, ECB President Mario Draghi might open the possibility of economic stimulus in the near future if the area economic outlook deteriorated due to the influence of Brexit.
The commodity currencies dropped sharply in yesterday's trading session. Canadian Dollar CAD weakened when oil prices on world markets continue to decrease to the 4-month low. Meanwhile, the possibility of cutting interest rates of Reserve Bank of Australia (RBA) in August was up to 60% after the minutes of the July meeting of this agency announced yesterday that the AUD strength is difficult for rebalancing economy and it emphasized that inflation expectations remain below the targets, this suggests the possibility of easing further monetary policy in the near future.
AUD/USD: SELL: 0.7520 TARGET: 0.7440; STOP-LOSS: 0.7560
USD was noted soaring against other major currencies during last week trading session following the positive data of U.S. economy, it strengthens reviews of the world's biggest economy of steady growth in the second quarter. In July 15th session end, Dollar Index measuring the strength of greenback versus a basket of currencies rose 0.7 percent to 96.60 points.
Report of the US Department of Commerce published Friday said U.S. retail sales in June rose 0.6%, 2016, significantly higher than 0.1% anticipated by analysts and recorded the third consecutive increase. Other statistic showed that U.S. industrial output rose 0.6% in June, recorded the strongest increase in 11 months. Besides, the consumer price index (CPI) in June rose 0.2%, same as the increase in May, this showed inflation tends to go up.
The positive statistics of U.S. economy boost investor back to the expectation that Fed will increase interest rates in the remaining months of this year. However, analysts believe that Fed will continue expressing caution at the meeting on June 26-27th. The Agency will await the evaluation of the impact of UK leaving the European Union (EU) for the prospects of the U.S. economy before giving the signal to adjust policy interest rates.
The coup in Turkey on Friday evening July 15th has created momentum for gold prices to go up in last week session. However, demand for haven assets diminished after the coup ended in defeat to push gold prices falling back in the first session of this week. Analysts suppose that the gold price this week will likely continue under pressure by the upward uptrend of USD.
Notable economic information this week is the PMI index of the euro area and the results of the meeting of the European Central Bank (ECB). Analysts predicted the ECB would not make any policy changes would in this session. However, ECB Chairman Mario Draghi will open the possibility for economic stimulus in the coming period if the Eurozone economic prospects deteriorate due to the influence of Brexit.
Though British pound fell during the session Friday but it had a recovery from the 31-year low after the Bank of England (BoE) kept interest rates at 0.5%, against forecasts of interest rate cuts. Employment data and retail sales of June announced this week as prediction will put pressure to GBP to drop again.
GOLD: SELL 1338; TARGET: 1322; STOP-LOSS: 1346
US dollar fell in Friday session as investors remained cautious at the prospect of rising US interest rates, despite the June employment report showed a strong turnaround.
British pound rose 0.3% against the dollar to 1,2951USD / GBP.
US dollar fell 0.4% against Japanese yen, down to 100,46JPY / USD.
Wall Street Journal Dollar Index Index, tracking USD with 16 major currencies, fell 0.3% after the June jobs report announced by US Labor Department.
Accordingly, USA created 287,000 new jobs in June which is the largest increase of the year, and it exceeded predictions of The Wall Street Journal survey.
However, the unemployment rate rose to 4.9%. Adjusted figures in May showed that USA created only 11,000 new jobs, the lowest level since 2010.
Analysts said that the positive employment data still can not change plans to raise interest rates by the discretion of Fed, this negatively affects US dollar.
Dollar fell against the currencies of markets. USD fell 2% against Brazilian real and 1.6% against Mexican peso.