Jan 17 (Reuters) – EUR/USD fell 0.3% Tuesday after a media report that the ECB might slow the pace of interest rate hikes after their February meeting , sparking a sharp drop in euro zone yields and broad euro weakness.
Two-year bund yields fell 11.6bp, led by lower rate hike pricing in the latter half of this year.
The drop may have been enhanced by dovish interpretations of comments made by ECB chief economist Philip Lane and on broader hopes worst-case energy crisis scenarios stemming from Russia’s war in Ukraine have been averted. But averting those risks and hopes China’s reopening will disproportionately benefit European businesses had also recently been viewed as supporting EUR/USD.
EUR/USD’s 1.0870 high on EBS Tuesday by the preceding three days’ highs came after extremely weak New York Fed manufacturing data pulled Fed hike expectations and Treasury yields lower.
But the market’s main focus remains Wednesday’s BoJ meeting outcome and whether it will further reduce its restraints on rising JGB yields that could trigger a fresh wave of yen buying . USD/JPY fell 0.14% after making a 127.99 low on EBS and above key 126.56 chart support.
With Japanese inflation persistently above the BoJ’s 2% target and staggering amounts of QE still unable to keep JGB yields below the 10-year yield cap raised in December , a further rate cap rise is likely.
If the BoJ delays substantial yield curve control adjustments and USD/JPY holds major support at 126.56 on the initial test, there could be a corrective rebound to sell, but it will take much stronger-than-expected U.S. data and Fed rate hike pricing to deter a broader unwinding of the 2020-22 uptrend.
Sterling rose 0.54%, initially on above-forecast UK wage growth and employment and then to its 1.2300 top on weak U.S. data.
The yuan fell 0.45% as the economic costs of China’s now abandoned zero-COVID policy were highlighted by one of the worst yearly GDP reports on record , tumbling property sector data and the first population drop in six decades .
Wednesday features U.S. retail sales, producer prices, industrial production and NAHB releases.
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(Editing by Burton Frierson Randolph Donney is a Reuters market analyst. The views expressed are his own.)
((Randolph.Donney@thomsonreuters.com))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
