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Fundamental Morning Wrap: EUR follows GBP lower, with JPY in G20 focus

Looking across the mornings research, we note three distinct themes in the markets eye this morning. EU GDP contraction, GBP decline amid inflation concerns, and Japanese monetary policy coming into focus at the G20.


Market analysts are quite neutral on EUR/USD this morning, primarily due to more focus elsewhere rather than lack of activity. Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the pair weakened modestly following sharper than expected contractions in French and German Q4FY12 GDP, but he is not expecting an extended move. Caroline Newhouse of BNP Paribas notes that despite the drop in German numbers, she is expecting a quick recovery.The ING Research team are anticipating this news to be compounded by a contraction in EU GDP while Westpac are more neutrally focused, commenting that, “The sharp decline in sovereign stress/easing of monetary conditions in the last 6 months should continue to feed into firmer business sentiment.”


GBP looks to be flavour of the day in terms of analyst attention. UBS Strategists Geoffrey Yu and Gareth Barry note that Cable looks vulnerable after yesterdays Inflation report. They feel UK inflation has previously been overlooked by traders, but with be gathering focus at the prospect of having to wait until 2016 until it comes back below 2%. They are looking towards the March 20th Budget as the next key event and are looking out for Credit agency comments. Lee Hardman of Bank of Tokyo Mitsubishi UFJ reiterates this sentiment, highlighting that the inflation report shows more evidence of BoE flexibility in anchoring its inflation report and that the bank is relying on a weak pound to aid rebalancing. Jim Reid of Deutsche Bank confirms the mood, commenting that GBP has long been under the radar. He feels that with the currency sliding as it is, the UK maybe the first country to test whether bond investors can tolerate long term weaker inflation anchoring from its central bank.


Of course, USD/JPY is the main focus overall, with Japanese monetary policy dominating talk at the recent G7 meeting and is set to be carried through to the G20. UBS Strategists Geoffrey Yu and Gareth Barry note that the BoJ held policy, but that candidate for Governor, Iwata commented that Yen would need to correct to around 90-100 before the 2% inflation target could be met. Interestingly then following on, Lee Hardman of the Bank of Tokyo Mitsubishi UFJ highlights that the bottom line take away from the recent G7 meeting is that it is ok for Japan to take measure to battle deflation and reignite its economy, but its not ok to talk down the Yen with specific targets. The Danske Research team note that rightfully Japanese monetary policy will be the primary focus at the G20 meeting in Russia, while Westpac feel that dips in USD/JPY will weigh on USD/KRW and USD/TWD. In the long run, they are sceptical of BoJ being aggressive enough to hit its 2% inflation target.

General Macro

UBS note that with the G7 proving the perfect example, the larger group of the G20 are unlikely to find a consensus and individual countries like South Korea may take issue with Japan. However, they note that while many Emerging leaders may want to jump on the bandwagon against Developed easing measures, few EM's have felt the pinch like South Korea as a consequence. In other news, Danske note that the US Treasury has rejected calls from 11 EU nations for a Tobin Tax on financial transactions.

Forex: EUR/GBP plunges below 0.8600 on EMU weakness

The EUR/GBP has fallen in a multi-tiered pattern as each successive GDP release across Europe today paints the same disappointing picture. Most recently, on the heels of GDP data in the EMU, the cross plunged and is currently establishing session lows at the 0.8592/93 level at the time of writing.
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