USD/JPY drops below key 107.32 support!

KBC Market Research Desk KBC Bank

USD weakness prevailed yesterday, driven by a sharp USD/JPY decline. The pair dropped from the 108.75 area to fill bids below 107.50 before European noon. The USD/JPY decline weighed also on other USD cross rates. EUR/USD trended higher in the 1.23 figure. We didn’t see a clear trigger for this yen-driven repositioning, but it created uncertainty on European equity markets. The USD decline slowed after a strong US NFIB confidence and ‘hawkish’ comments from Fed’s Mester (no impact yet from recent turmoil), but USD sentiment remained weak. EUR/USD closed at 1.2352. USD/JPY finished at 107.82.

Overnight, most Asian equities indices are in positive territory in line with WS. Several markets are heading for a holiday period (Lunar New Year) starting tomorrow. Japan underperforms as the rise of the yen continues. USD/JPY dropped below the 107.32 support, reaching the lowest level since November 2016. Japan Q1 GDP was soft (0.5% Q/Qa), but domestic spending OK. For now, there are few comments from Japanese officials on the rise of the yen. The USD/JPY slide still weighs on other USD cross rates. EUR/USD trades in the 1.2375 area. EUR/JPY is nearing the key 132/131 support area.

Today, Q1 GDP releases in Germany, Italy and EMU are interesting, but the focus for global trading will be on the US CPI, and to a lesser extent US retail sales. Headline CPI is expected to ease from 2.1% Y/Y to 1.9% (core from 1.8% to 1.7%). The dollar probably needs above consensus inflation to change fortunes for the better. We also keep an eye at the strange combination of yen-strength and at the same time relative equity resilience (in Asia ex-Japan and in the US). How long will this pattern persist? Technically, EUR/USD consolidates between 1.2165 and 1.2537. The pair dropped below 1.2323/35 support but follow-through price action was modest. Next support at 1.2165 looks far away for now. We assume that current USD weakness won’t push EUR/USD beyond the 1.2537 top yet.

UK CPI printed slightly above consensus yesterday (headline 3.0%), but didn’t help sterling. The report won’t change the BoE’s rate hike path. After a brief dip, EUR/GBP returned to the 0.89 area. Today, there are no UK eco data. EUR/GBP is trending higher in the 0.8690/0.9033 range, with intermediate resistance at 0.8930. We hold our view that the 0.8690 support won’t be easy to break without big progress on Brexit.

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KBC Market Research Desk

KBC Bank

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