ECB hikes but hesitates, BoJ makes YCC more flexible

The USD got some considerable support yesterday against its counterparts, as the preliminary GDP rate for Q2 accelerated instead of slowing down as expected, highlighting the resilience and the prospects of the US economy. At the same time, the weekly initial jobless figure came in lower than expected, implying that the US employment market may not be as loose as expected. Both financial releases tended to provide a bullish boost to the greenback and attention today turns to the US consumption and inflation data.

Across the pond, EUR traders are expected to have a busy day ahead. On the monetary front, the ECB yesterday delivered a 25-basis points rate hike as was expected, yet in its the bank stated that “The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period”. Yet overall and in contrast to the market’s marginal expectations for another rate hike in the September meeting, the bank allowed for increased doubt for such a scenario, as ECB President Lagarde characterized the future decision as a “decisive maybe”. The release was clearly less on the hawkish side and tended to weaken the common currency. EUR/USD dropped yesterday breaking the 1.1020 (R1) support line, now turned to resistance. We tend to switch our outlook for the pair towards a bearish one, given also that the RSI indicator has reached the reading of 30 implying a strong bearish sentiment on behalf of the market, yet there seems to be some easing of the bearish tendency. Should the bears maintain control over the pair, we may see EUR/USD breaking the 1.0920 (S1) support line and aim for the 1.0835 (S2) support level. Should the bulls take over, we may see the pair reversing course breaking the 1.1020 (R1) resistance line and aim for the 1.1145 (R2) base.

Across the world, BoJ remained on hold as was expected and actually did tweak its Yield Curve Control (YCC) policy, yet not exactly the way the market expected. The bank actually announced that it will continue purchasing Japanese Government Bonds (JGB) yet show a wider flexibility in its tolerance regarding their yield. The ultimate band is widened to 1% from the prior 0.5% yet the bank stated that it may also purchase JGBs without waiting for yields to reach a full 1%. In any case, the decision despite BoJ’s dovish narrative, was perceived as some sort of tightening and provided support for JPY, yet we have to note that JPY had already started to strengthen getting also tailwinds from the unexpected acceleration of Japan’s headline CPI rate. USD/JPY also showed some strong bearish tendencies as it dropped breaking the 139.15 (R1) support line, now turned to resistance. We tend to maintain a bearish outlook for the pair as the RSI indicator nears the reading of 30. Yet we note that the price action has broken the lower Bollinger band, something that may force the pair to stabilise somewhat if not correct a bit higher. Should the selling interest be maintained we set as the next possible target for the bears the 137.40 (S1) support line. For a bullish outlook of the pair, despite it not being probable, it’s possible and that scenario should be covered, we would require the pair to reverse direction, break the 139.15 (R1) resistance line and actively aim, if not break the 140.80 (R2) level.

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Today in the European session, we note the release of France’s and Sweden’s preliminary GDP rates for Q2, France’s and Germany’s preliminary GDP rates for July and the Eurozone’s economic sentiment for July. In the American session, we note from the US the release of the Consumption rate and the Core PCE Price Index, both being for June as well as the final University of Michigan Consumer Sentiment for July, while from Canada we get the GDP rate for May. In Monday’s Asian session, we get Japan’s preliminary industrial output rate for June, and China’s NBS July PMI figures, with the heavy point being placed on the manufacturing sector.