Macroeconomic overview

Inflation in the Eurozone accelerated to 1.8% yoy, up from 1.1% in December, putting it within range of the European Central Bank’s medium-term target of below but close to 2%. It was the highest rate since February 2013.

Core inflation, which excludes volatile prices of energy and unprocessed food and which the ECB focuses on in its policy decisions, was stable at 0.9% yoy, however.

ECB President Mario Draghi said last Thursday he would look past energy price fluctuations until underlying inflation picked up in a “convincing” way.

Energy prices jumped 8.1% year-on-year in January after a 2.6% increase in December and unprocessed food was 3.3% more expensive than a year earlier.

Separately, the statistics agency said Eurozone GDP rose 0.5% qoq in the last three months of 2016, as expected, for a 1.8% yoy rise. In the whole of 2016, euro zone GDP rose 1.7%, down from a five-year high of 2.0% in 2015.

Stronger economic growth also helped bring down the bloc’s unemployment rate to 9.6% in December, the lowest since May 2009 before Greece’s debt crisis broke out.

Technical analysis

The rejection of a bearish move yesterday is an important signal for the coming days. The EUR/USD remains above the 14-day exponential moving average, which highlights that the overall structure is bullish now.

Trading strategy

Today’s Eurozone inflation reading is a strong support for our long position. The market will be focused now on Fed statement. We do not expect a strong hint for the timing of the next rate Fed hike, which should also fuel the EUR/USD rise. Recent macroeconomic data from the Eurozone are pretty in line with our long-term scenario, which encourages us to open a long-term EUR/USD position with the target at 1.1090.

USD/JPY: BOJ raised its growth forecasts, as expected

Macroeconomic overview

As widely expected, the BOJ maintained a pledge to guide short-term interest rates at minus 0.1% and the 10-year government bond yield to around zero.

In a quarterly review of its forecasts, the BOJ raised its growth estimates for the fiscal year beginning in April to 1.5% from 1.3% forecast in November, nodding to brightening prospects for exports.

It also hiked its forecast for fiscal 2018 to 1.1% from 0.9%.

But the central bank left unchanged its already optimistic inflation forecasts for the coming years even as external factors push up prices, such as a rebound in oil prices and rising import bills from a weak yen. The BOJ said it expects inflation to hit its 2% target by around March 2019.

“The momentum for achieving our 2% inflation target is maintained, but lacks strength,” the BOJ said in the quarterly forecast report, warning that global uncertainties could make companies cautious of hiking prices and wages.

Japan’s core consumer prices marked the 10th straight month of annual declines in December despite more than three years of aggressive money printing by the BOJ, underscoring the country’s sticky deflationary mindset.

Japan’s growth remained anaemic in the first half of last year as consumption slumped. But a pick-up in global demand has helped exports recover, giving rise to market bets the BOJ’s next move may be to hike – not cut – rates. The recovery prospects and sharp rise in global yields on hopes of Trump’s reflationist policies have encouraged talk among some investors of a rate hike by the BOJ as early as this year. Speculation that the BOJ could taper its asset purchases earlier than expected heightened also after the BOJ skipped a much anticipated auction to buy short-term debt last week.

Japan’s industrial output rose 0.5% in December from the previous month, preliminary government data showed on Tuesday. The result compared with a median market forecast of a 0.3% increase.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 3.0% in January and increase 0.8% in February.

Separate data on Tuesday showed household spending fell 0.3% in December year on year, marking the 10th straight month of declines but beating the 0.6% decrease projected by the market. Household spending dropped 1.5% in November.

Japan’s jobless rate was steady at 3.1% in December and the jobs-applicants ratio rose to 1.43 from 1.41 the previous month.

Technical analysis

The USD/JPY has been fluctuating between 112.43 (50% fibo of 2015-2016 fall) and 115.60 (61.8% fibo). However, the momentum remains slightly bearish as 14-day exponential moving average remains negatively aligned. The failure on Friday ahead of the kijun line at 115.56 increased odds for another test of January low at 112.54. Breaking below that level will open the way to 111.96 (38.2% fibo of November-December rise).

Trading strategy

We stay short for 112.00 in the short term. Our bearish view is supported by fundamental factors (raised BOJ forecasts) and technical analysis. Long-term outlook is also bearish.

TRADING STRATEGIES SUMMARY:

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