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EUR/USD’s Upside Turned More Limited


Bond yields on both sides of the Atlantic rose a few basis points before separate news reports killed off the advance abruptly. The culprit in the US was an awful Empire manufacturing, plunging to the lowest level since mid-2020 on slumping new orders and stalled hiring. US short-term yields ended the day 2-2.8 bps lower. Yields at the long end of the curve revisited intraday lows after the release but closed about 4 to 5 bps higher still eventually. On European soil, a Bloomberg story was responsible for German yields declining between 5.6 bps (30y) and 10.9 bps (2y), outperforming vs swaps by a 1 to 2 bps. Sources to the news agency said ECB policymakers are considering a slower pace of rate hikes from the March meeting on. A 50 bps move in February is still seen as most likely. They added a slowdown in the tightening shouldn’t be viewed as the ECB going soft on its mandate. Nevertheless, if that’s the case it is a less hawkish approach than president Lagarde outlined at the December meeting. The euro paid in cash. EUR/USD aborted its attack on recent highs around 1.087 and dropped to 1.078 even as the dollar himself again traded unconvincingly. DXY’s (trade-weighted dollar) bottoming out continued but no more than that. EUR/GBP tanked below 0.88 with a pinch of sterling strength present too. It followed a solid labour market report with near-record wage growth keeping the pressure on the BoE.

The Bank of Japan held a closely watched meeting this morning but the mountain brought forth a mouse. It kept rates steady at -0.1% and stuck to its YCC program to keep the 10y fixed at 0% with a 50 bps range. Some expected the BoJ to further widen the allowed deviation given the ongoing inflationary and, even more so, market pressures. The BoJ raised inflation forecasts to 1.8% at the end of the horizon with risks tilted to the upside but clearly considered it insufficient for further policy tweaks. The yen takes a heavy beating as bets on a hawkish twist unwind. USD/JPY surges from 128.12 to 130.75. Japanese equities are the star performer though, adding up to 2.5%. Bond yields in the area tumble 4-11.1 bps with the 10y taking the lead in the decline. Moves spill over to US Treasuries. Cash yields drop 2.7-6.6 bps.

US retail sales are due later today. They are expected to have further declined m/m in December. There’s probably more scope for a US/core bond yield reaction in case of a negative surprise given yesterday’s disappointing Empire manufacturing and general sentiment vs central banks following the ECB and BoJ news. The dollar in such a case could stay under pressure but with yesterday’s Bloomberg story, EUR/USD’s upside turned more limited. 1.0942 strengthened as a resistance. Sterling extends gains this morning following a CPI-beat. Headline inflation eased from 10.7% to 10.5% as expected but monthly dynamics were stronger than consensus (0.4% m/m vs 0.3%). Moreover, core price growth stabilized at 6.3%, defying expectations for a decline to 6.2%. EUR/GBP falls towards 0.8769. First meaningful support kicks in at 0.8721.

News Headlines

IMF deputy managing director Gopinath subtly changed the organization’s rather pessimistic view at the World Economic Forum in Davos. Recall that IMF managing director Georgieva in a NY address warned that a third of the global economy will be hit by recession this year, calling 2023 a “tougher” year than 2022. Gopinath still referred to the “tough” year with inflation still too high and central banks staying on course with interest rates to tackle the problem, but she also stressed an expected improvement in the second half of the year, stretching into 2024. Lower energy prices and the Chinese economic reopening triggered an extremely bullish start to the year with markets disagreeing on the central bank part of the story. German Chancellor Scholz in an interview with Bloomberg also spread optimism by vowing that Germany will go into a recession.

Slovakia’s interim PM Heger in a statement announced that snap elections in the fall appear to be the most realistic scenario at the moment. Regular elections were scheduled for February 2024. Heger’s administration collapsed in December. Attempts to gain a majority since losing that no-confidence vote, failed: “With today, I consider all attempts to establish a new 76 (majority) to be closed,” he said. To trigger snap elections, parliament needs to shorten their term which may happen at next week’s opening session (Jan 24).

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