The USD/JPY has regained its footing following equities lead, as European officials have reached an accord to provide a bailout package for Greece. The lack of details for the proposed aide had markets jittery to start the day generating a flight to safety. The prospect of the issue finally being resolved has sparked optimism and limited support for dollar/yen. The pair has seen its relationship with risk trends strengthen as the dollar begins to lose its status as a funding currency. The correlation between the two has risen sharply to 35% from 17% a week ago to become just as influential as U.S. interest rate expectations. The closer a rate hike gets the more influence yield expectation will have on price action.
BoJ Interest Rate Expectations
BoJ interest rate expectations remain non-existent with markets pricing in 1 bps of tightening over the next twelve months. Therefore, the will continue to have little influence over price action. However, the upcoming rate decision could alter yield outlooks of fiancé officials change their rhetoric regarding deflation. Currently, policy makers are forecasting that downward pressure on prices could linger for the next two to three years. To discuss this and trading ideas join the USD/JPY forum.
FOMC Interest Rate Expectations
The upcoming U.S. advance retail sales report is the most significant release in a light week for event risk. Economists are forecasting a 0.3% rise in demand for January which could raise interest rate expectations as strong consumer consumption will put upward pressure on prices. Rising inflation would be the one catalyst that could shorten the horizon for future tightening. Fed Funds futures continue to reflect the dimming outlook for a rate hike with a zero percent chance at the March meeting (therefore not worth showing), and only a 36.2% chance by August compared with 54.8% a month ago. Fed chairman Ben Bernanke reiterated that interest rates will be on hold for the foreseeable future after laying out the outline for removing liquidity.
The Dow is currently in an upward trending channel which leaves upside potential for stocks over the short-term. A Greek bailout could generate a relief rally before another turn lower. Tomorrow’s expected positive retail sales report adds to the case for a near-term bullish push. Ultimately a lack of supporting fundamentals threatens upside potential and favors a continuation of the current medium-term retracement. To discuss this and other fundamental data join the Economics Forum.
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