USD/JPY remains one of BNP's top two G-3 trades

EUR/USD

EUR/USD was placed under pressure from the get-go as participants responded to the growing policy divergence between the ECB and Fed. In his speech on Friday, ECB’s Draghi said that the ECB are ready to adjust their policy stance further but are confident June measures will provide intended boost to demand. However, the FT wrote that with inflation expectations falling sharply, ECB’s Draghi said that the bank “will acknowledge” these developments, raised speculation that the central bank will take bold action against deflation. The key focus here was on the ramifications of ‘bold action’ with some participants speculating that this could indicate a potential QE programme. This in contrast to Fed Chair Yellen’s increasing hawkish tone saw USD out-muscle the EUR as the pair slipped below the 1.3200 level. This move to the downside was exacerbated by yet another weak German data point, this time with the German IFO survey falling short of expectations, thus triggering further concerns over the fragility of the German economy given its weak GDP reading a few weeks ago. Thereafter the pair traded in a relatively rangebound manner with a lack of further notable newsflow to influence the pair’s price action. Looking ahead, all eyes will be on any further rhetoric from any ECB members and whether it compliments or provides a contrarian tone to the comments made by Draghi on Friday.

GBP/USD

In terms of newsflow from over the weekend, BoE’s Broadbent said wage growth has permanently shifted downwards, adding that lower spare capacity could now take longer to appear in the data. Broadbent’s comments hint that he may be willing to tighten policy before inflationary pressures appear in official data. The hawkish tone struck by Broadbent saw GBP outperform throughout the session, with the currency also gaining strength from the weaker EUR as EUR/GBP extended its decline below the key psychological 0.8000 handle. Thereafter, with the UK away from market the pair slowly extended its opening gains with a lack of further fundamental newsflow to direct price action.

USD/JPY

Overnight, USD/JPY touched a 7-month high following dovish comments from BoJ Governor Kuroda, who said that QE will continue until inflation expectations are anchored which may take “some time”. Nonetheless, the pair drifted back towards the 104.00 handle which is said to be a large option expiry at the NY cut worth USD 1bln.
Thereafter, the pair continued its move lower throughout the European session alongside the move higher in USTs which saw the pair lose out to unfavourable interest differential flows. Elsewhere Citi cut all their USD long positions in an opportunistic trade and long USD/JPY remains one of BNP's top two G-3 trades. Looking ahead, attention for the pair may reside stateside with US durable goods orders due for release.