Financial markets saw plenty of action last week, but ended on a slightly subdued tone as traders took a breath heading into the weekend. Federal Reserve Chair Janet Yellen spoke to the Chamber of Conference on Thursday but there was little of interest to forex traders as comments were kept short and to the point. This led to some consolidation of the week’s forex moves while equity indices retraced some of Thursday’s sharp drop.
By the end of Friday, the Dow Industrial Average had gained 0.27%, the S&P 500 was up 0.37%, and the NASDAQ 0.52% on the day. The EUR/USD dropped back from 1.372 early in the day to below the 1.37 line while GBP/USD made its way to 1.682 and USD/JPY stayed at 101.5.
Central bank action played a part in Europe too last week and some traders were unsure of what to make of Bank of England Governor Mark Carney’s latest comments. Carney indicated that interest rates should remain low well into 2015 but also said that rising house prices could be a dampener on economic growth. Overall, traders took a dovish view and that saw the GBP/USD drop to 1.674 before recovering on Friday.
Meanwhile, EUR/USD traders remained vigilant after Mario Draghi’s dovish outlook and although the currency is now in oversold territory there is very little to cling on to for euro bulls. Draghi’s intent of renewed monetary loosening in next month’s ECB meeting has already helped to alleviate pressure on an elevated euro.
Also causing waves in the currency market is the prospect of falling US treasury yields as US ten year government bonds fell to a new low of 2.49, sharply below the 2.99 rate recorded at the beginning of the year. The drop in yields comes as small cap stocks and technology shares showed further weakness. Economic data also showed signs of softening and there was continuing tension in Ukraine.
US bond auctions are still being met with high demand; however, it remains likely that the Fed will stick to their previous guidance and interest rates are not likely to be hiked before the second quarter of 2015.
Upcoming Events
Canadian markets will be closed on Monday thanks to the Victoria Day holiday but there will be plenty to occupy traders later on in the week. On Tuesday, the latest meeting minutes from the Reserve Bank of Australia will be released while the RBNZ will also release their latest inflation expectations. We will also see a raft of inflation data out of the UK, as well as retail sales data and meeting minutes from the MPC.
On Wednesday, traders will be fully focussed on the latest BoJ interest rate announcement and accompanying statement.
USD/JPY
The USD/JPY consolidated on Friday with the currency hovering around 20 pips below its main pivot for most of the trading session. The quiet activity made it difficult for day traders and the long term chart indicates how quiet USD/JPY has been in recent weeks. This week, though, there is likely to be renewed activity, particularly with the latest BoJ meeting looming.
Many expected the BoJ Governor Kuroda to loosen in last month’s meeting but were left disappointed. This time around will could see the same kind of result for traders, particularly given the most recent 5.9% quarterly GDP print out of the country.
Traders are still pricing in the possibility of more stimulus but the likelihood is for Kuroda to wait, especially now that GDP has shown such impressive growth. As a result, traders should look to sell USD/JPY this week and keep their stops above the significant 102 resistance level.