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FX: The last day of the week, month and quarter, so expect increased volatility in markets as big players rebalance portfolios, adjust hedges and adjust their trading books for month end.

Idea of the Day

The fireworks over Japan’s attempts to reflate its economy have subsided and what the market is looking for are signs that it’s working. It’s too early to expect to see this in the inflation data, which came in broadly as expected (from -0.7% to -0.4%), but activity data in the form of industrial production and retail sales were both better than expected.

This was always the way it was likely to work, with better real sector data leading to higher prices (or less deflation), but with the inflation numbers also serving to help by enticing households to spend now, rather than hold back waiting for prices to fall.   The yen was weaker on the back of the data and in general, we expect USDJPY to display much more of an upward creep, rather than the sharp moves higher seen earlier in the year, as the data slowly starts to move the way the authorities want.

Latest FX News

JPY: The yen was the weakest of the majors in overnight trade as inflation data falls into line whilst activity data improves somewhat. USDJPY briefly touched 99.00, weakening vs. the Aussie for the sixth straight session.

EUR:  The single currency has been under modest pressure this week as peripheral yields have risen and expectations have been kept alive of further easing from the ECB. EURUSD bounced from the 1.30 level yesterday, with a conflux of 50, 100 and 200 day moving averages around the 1.3069 to 1.3078 area.

GBP:  Sterling sagged on Thursday after the latest GDP data showed us that the UK economy was not quite as strong as previously believed, even if the previous (small) second recession in recent history was revised way.   Cable pushed below the 100 day moving average at 1.5307 to touch 1.52 toward the end of the European session.   Overnight release of consumer confidence showed as expected reading of -21 (previously -22).

Forex Analysis: GBP/USD Extends Plunge Below Major Support

USD: The growing message this week from Fed officials is that markets have over-reacted to the Fed’s statement and comments from last week. Earlier in the week it was the ‘feral hogs’ of the market, more recently it was the NY Fed President reminding markets that interest rate rises were some way off.