Talking Forex: EUR/USD Settled In Minor Positive Territory

EUR/USD
The pair settled in minor positive territory on Monday, driven by a weaker USD following a sharp sell-off by USD/JPY after Japan’s Amari said that the correction of the strong JPY is largely completed. Overall, it was a very quiet start to the trading week as Whit Monday holiday had market participants sit on the sidelines and as such the price action was largely driven by JPY related flows. Still, Moody's said that Italy's stronger public finances are one of the main reasons for keeping its sovereign debt rating one notch above that of Spain. While press reports indicated that confidence in the government in Italy is already falling, with one poll by the SWG institute putting its approval rating at 34%, down from 43% at the start of the month. Nevertheless, firmer stocks underpinned the tightening of peripheral bond yield spreads with respect to the benchmark German Bund this morning, with IT/GE 10s and SP/GE 10s tighter by around 6bps. Of note, the 30-day rolling correlation between the pair and gold remains in close proximity to last week’s highs of 0.3408, which was the highest level since December 2012 and signals that the USD strength may continue in the near-term.

GBP/USD
The pair traded in tandem with EUR/USD this morning, which was itself driven by JPY related flows after comments from Amari overnight resulted in an aggressive move lower by USD/JPY. In terms of macroeconomic news flow, BoE's King said the UK economy is in recovery but policy makers need to do more to lift growth; said ' we're seeing a recovery, but it's only a modest recovery, and we certainly can't be satisfied with it.' He added the biggest risk to the UK economy stems from the Eurozone, which remains in recession, sapping demand for UK exports and threatening British banks with losses. Separately, according to Ernst & Young ITEM Club, UK inflation is to be at least 2.5% for four years.

USD/JPY
JPY was seen firmer across the board on Monday after Amari said that “the correction of the strong JPY is largely completed. If JPY keeps on weakening a lot more, it will have a negative impact on people’s lives”. Furthermore, he said if a weakening JPY does have a negative impact on living costs, it's our job to figure out how to minimize that, Amari also added that the stock rise "has been a bit faster than we'd expected.” At the same time, Japan 30y yields surged after a Cabinet Office official told reporters that BoJ’s Kuroda said it’s natural for yields to increase gradually as the economic outlook improves. However according to the advisory panel to Finance Minister Taro Aso, there is "absolutely no" guarantee that domestic investors will keep buying government bonds, citing the risk of a spike in bond yields that could crimp long-term growth prospects.