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BoJs Ueda surprises with dovish tone, now attention turns to inflation numbers

Good morning

 

All pretty quiet in the currency markets yesterday and again overnight, EURUSD currently a fraction higher at 1.0935 having been in a tight 1.0905-1.0930 range since yesterday morning, GBPUSD has seen a bigger range of 1.2630-1.2705, those highs were early yesterday morning and as I type the pair is 1.2675.  This slight US Dollar weakness seems to come from the idea that US could need to cut rates three or four times next year to ensure they are not too restrictive as inflation falls.  Not really much we haven’t already heard but more just a continuation of this ‘Fed rates have peaked, cuts will be needed’ theme.  Mind you Goldmans have said they now see five 25bps rate cuts through 2024.

 

EUR performing mildly better than GBP has seen GBPEUR slip back below 1.1600, now 1.1590 but was as low as 1.1565 in late afternoon yesterday.  This goes a little against the notion that BoE will be the last and slowest to cut rates, however ongoing concerns over the UKs economy is weighing a touch.  Tomorrow morning will see the latest UK inflation numbers where we look for another dip in the annual rate from 4.6% to 4.4% and also a slightly lower core reading at 5.6% from 5.7%.  If we don’t see these declines I’d expect to see GBP higher.

 

BoJ left rates unchanged overnight and left its forward guidance unchanged as well, disappointing those, myself included, who thought they may well offer some hawkish surprise.  Instead Ueda actually mentioned the potential to ease further if needed and said inflation may move up towards target through 2025 but that’s a bit further away than many had thought, its almost as though Ueda is being deliberately dovish.  As a result, USDJPY pushed higher, trading up from a low yesterday afternoon of 142.30 to current levels at 144.45.  Decent levels to get on some downside into 2024 if I find the right trade but does show once again how key timing is and chasing Yen higher is a difficult game to play.  

 

In other news, the Icelandic volcano that has been threatening to for some weeks has finally erupted giving rise to some pretty spectacular footage.  It could be seen from Reykavik, some 25 miles away.  There are no reports of injuries, the area had been evacuated some weeks ago, nor is there any talk of a repeat of the ash clouds that disrupted flights back in 2010.  However officials have warned that the famous tourist attraction, the blue lagoon, could be under threat from lava flows.   

 

The other headline that no one really wants to see is that US are moving assets to step up military action against Houthi rebels in an attempt to protect ships in the Red Sea.  Recent attacks have seen many large shipping firms say they are avoiding the area, despite Houthi claims that only Israeli ships, or those heading to Israel, are at risk of attack.  The US are putting together a force involving other western nations, UK included.  It has taken time but the fear now is that we are slowly being dragged into war in the Middle East.  Meanwhile, Israel continue their attacks on Gaza as they try to eliminate Hamas, but are coming under more scrutiny as their actions seem to be becoming more indiscriminate.   

 

EU inflation this morning although we’re not expecting any major changes, CAD inflation this afternoon is expected to show further declines, for the record USDCAD currently 1.3390, well down from the early-Nov highs near 1.3900 and the lowest levels in USDCAD since August 2023.  For me the key is UK inflation tomorrow morning.

 

-  10.00 EU HICP

-  13.30 US building permits, housing starts

-  13.30 CAD CPI

-  23.50 Japan trade balance

-  01.15 PBoC rate announcement

-  07.00 UK CPI, RPI, PPI

 

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