Bank of Japan leaves rates unchanged, EU CPI set to be confirmed at 28-month low

We saw a negative start to the week for European markets yesterday, as we head towards the last few trading days before Christmas with the FTSE100 managing to buck the negative trend largely due to a rebound in the energy sector and a strong performance from telecoms.

A rebound in oil and gas prices over the ongoing uncertainty in the Red Sea and Suez Canal, due to attacks on shipping by Houthi rebels from Yemen, which prompted the likes of Maersk and BP to suspend travel through this route, does have the potential to exert upwards pressure on inflation and in so doing act as a price shock in global supply chains if sustained.

We aren’t there yet however especially since oil prices are still near 5-month lows with talk of soaring petrol prices in the leadup to Christmas rather alarmist at this early stage.

The rest of Europe slid back modestly mainly on the back of profit taking, having come off the back of a series of weekly gains, and after further evidence of economic weakness in Germany, Europe’s largest economy after a weak IFO business confidence survey.

This economic weakness combined with poor manufacturing and services data these past few months makes it all the stranger that a few days ago, the European Central Bank while taking the decision to leave rates unchanged and then insisting that they had no intention of cutting rates in the near future.

We have been here before with the ECB, a refusal to see the evidence in front of their faces that the economy is struggling, in 2008 and then again in 2011, so perhaps it could be argued that 3 times is a charm.

ECB President Lagarde came across as very hawkish, insisting that rate cuts had not been discussed which in itself is very revealing given that the US Federal Reserve has discussed cutting rates against a backdrop of 5.2% GDP growth, unemployment of 3.7%, and CPI at 3.1%.

Apparently, the ECB would have you believe that they aren’t with headline CPI at 2.4% and an economy on its knees.

The reality is the data speaks for itself, and the region appears to be heading for recession if not already in one.

With the flash CPI numbers slowing sharply to 2.4% at the start of this month, down from 2.9%, today’s final CPI numbers are expected to come in unchanged from the flash numbers, while core CPI is slowing as well, albeit at a slower rate, coming in at 3.6%.

Lagarde did place greater emphasis on the core numbers when it came to any decision on rate cuts, however when other data is taken into consideration it’s hard to argue against the prospect that headline inflation could be back at 2% by the start of next year, thus making it even less credible that the ECB should be pushing back against imminent rate cuts.

While the ECB is reluctant to countenance rate cuts the Bank of Japan has the opposite problem and a refusal to countenance rate hikes with a headline rate of -0.1%.

In recent days there have been rumblings that this might change with this morning’s decision by the Japanese central bank, the final big macro event of 2023.

Having teased the markets about their intentions over rates as well as yield curve control over the past few weeks and months the Bank of Japan kept interest rate and monetary policy unchanged this morning. The central bank didn’t offer any further guidance as to their future intentions with today’s press conference by Governor Ueda set to be keenly scrutinised for the central bank’s future policy intentions.

Against this backdrop and another strong finish for US markets, European stocks look set to open modestly higher.      

EUR/USD – while below the recent peaks at 1.1015/20 the bias remains for a move back to the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the July peaks at 1.1275.

GBP/USD – last week’s failure at 1.2795 has prompted further weakness with the potential for a move back to the 200-day SMA at 1.2520. The bias remains for further gains while above the 200-day SMA at 1.2520. We also have support at the 1.2590 area.

EUR/GBP – has rebounded back to the 100-day SMA at 0.8640, with a break targeting the 0.8700 area. Support at the 0.8570/80 area. A move below 0.8580 targets 0.8520.

USD/JPY – having slipped below the 200-day SMA at 142.50 last week, we’ve squeezed back above it and could move up to 146.00 in the short term before running out of steam. While below 146.00 the bias remains for a move below 140.00.