[B]BoJ eases aggressively, no change expected from BoE and ECB[/B]
Today’s UK opening call provides an update on:
• BoJ lives up to expectations, aggressively easing monetary policy;
• Eurozone services PMIs expected to be weaker in line with manufacturing PMIs earlier in the week;
• ECB unlikely to cut interest rates despite drop in inflation to 1.7% in March;
• UK relying on strong services PMI to avoid triple dip recession;
• No change expected from Bank of England before Mark Carney takes over on 1 July;
• US jobless claims forecast at 350,000.
With three central bank meetings on Thursday there was always going to be plenty of volatility in the markets, and the Bank of Japan has got us off to a flying start.
The BoJ, under new Governor Haruhiko Kuroda, has announced a massive bond buying program, which has without doubt lived up to market expectations. The central bank has committed to buying 50 trillion yen of government bonds annually, while changing the maturity of its purchases from below three years to roughly seven years. Bond purchases will include all maturities up to, an including, 40-year JGBs.
The yen fell more than 100 pips against the dollar shortly after the announcement, and has continued to weaken further. The next target for the pair will be last month’s highs of 96.7 and I see no reason why it won’t reach that level by the end of the week. Over the next few weeks, I expect it to extend these gains, with 100.0 now definitely being in sight.
There’s going to be plenty of volatility in the euro pairs today, with the release of the services PMIs likely to shake things up before the ECB rate decision and post-meeting press conference. The services PMIs are going to be watched closely following the disappointing manufacturing PMIs earlier in the week. Any weakness here will not be well received in the markets and will be seen as a clear sign that the political uncertainty in Italy and disastrous bailout of Cyprus are weighing heavily on confidence in the region.
The main event in the eurozone on Thursday will be the ECB rate decision and press conference that follows. As always, close attention will be paid to the rate decision, although no change is expected on this occasion. Another drop in eurozone inflation in March will mean a rate cut will probably be heavily debated. However, a weaker euro over the past couple of months may lead to increased inflation risks, meaning a rate cut in the coming months is unlikely.
In the UK, the services sector will need to perform strongly if the country is going to have any chance of avoiding a triple dip recession in the first quarter of 2013. March’s PMI should give the biggest indication yet about whether it will manage this. Manufacturing figures have been extremely disappointing again in the first quarter, but given that the industry only accounts for one fifth of GDP, the figures from the services sector are far more important. A weak services PMI today will all but condemn the UK to its third recession in five years.
The Bank of England is expected to keep interest rates and asset purchases on hold again this month. Despite the voting being much closer in the last couple of months, with three members including Sir Mervyn King voting in favour of another £25 billion of asset purchases, a swing in favour may be a bit much to ask. Moreover, with Mark Carney set to succeed King as Governor on 1 July, members currently against additional purchases will probably opt to wait until then before changing their mind. This is even more likely given the amendment to the BoE’s mandate which will allow them to use more unconventional monetary policy, such as committing to lower interest for a certain period of time, or until a predetermined improvement is seen in either the labour market or growth.
The debt auctions in France and Spain are likely to be largely overshadowed by central bank meetings today. Spanish yields rose shortly after the inconclusive Italian election back in March but have since fallen back again, so I don’t expect any surprises here. French borrowing costs have also remained low despite concerns over the state of the economy and its ability to regain competitiveness in the near future, so there should be no complications here.
In the US, weekly jobless claims are expected to fall slightly to 350,000. That being said, we saw signs of second quarter blues in the ADP figure on Wednesday, which could now also be seen in the non-farm payrolls figure on Friday. Given that the weakness in the second quarter of 2011 and 2012 was accompanied by a rise in the number of jobless claims, we should now be on standby for a jump in this figure in the coming weeks. If the number of claims remain low, it could be a sign that the country will avoid the dip in the second quarter this year and that the economic recovery is in full flow.
[B]EURUSD[/B]
The pair appears to have become stuck in a range since breaking below a key level of support a couple of weeks ago. Having broken below the 200 day SMA and 50 fib level, I still expect the pair to fall back to the 61.8 fib level, around 1.2678, however first it will need to break its current support of 1.2750. That being said, the weekly chart may suggest otherwise. The pair appears to be finding support from the neckline of the inverse head and shoulders, which formed between February and December last year. If this continues to hold, it suggests there may still be plenty of strength left in the pair, with the target being 1.42 later this year.
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[B]GBPUSD[/B]
Sterling is finding support again this morning around 1.51, from the 38.2 fib level. This is also the neckline of the double top which formed over the last couple of weeks, which is why it’s proving to be such a big level of support. Based on the size of the formation, a break below here should prompt a move back towards 1.49, which was previously a major support level for the pair. It should find further support along the way, around 1.5045, 1.5025 and 1.4994.
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[B]USDJPY[/B]
Yesterday, we mentioned that the future direction of this pair was dependent on how aggressively the Bank of Japan eases monetary policy over night. Well, it would appear that they were aggressive enough, with the yen sliding more than 200 pips against the dollar already. The pair found pretty solid support from the 61.8 fib level over the past few days, which suggests that traders were expecting an aggressive approach from the BoJ and were just waiting for signal. The next question is how far will the pair go? The next clear target is 96.70, last months highs, with the pair finding resistance along the way around 95.81, 96.12 and 96.58.
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Ahead of the open we expect to see…
[U][B]Read the full report at Alpari News Room[/B][/U]