The European session saw speculative accounts and leverage funds reduce their short-JPY exposure. Carry trade concerns and US-China relations were flagged as risks as we enter the G7 meeting. USD/JPY filled in 118.50 bids and triggered stops below 118.40 to print a 118.22 low. The downside was underpinned by interest from life insurers to buy. Bids were reportedly heavy in the 118.00-20 zone offsetting the profit taking by speculative accounts.
EUR/JPY was underpinned initially by EUR/USD strength but eventually headed lower due to the broad JPY moves. The pair broke back below 160.00, yet found support amid investor demand for European bonds and reports of some players establishing fresh short JPY positions amid the pullback into 160.00. The afternoon session will take its lead from US PPI data.
The stagflation story has been growing amid inflationary pressures and the slowdown in US growth. The market is focused on growth though and whether the US can negotiate a soft landing. An inflationary build up would restrict the Fed's hand and could ultimately undermine dollar sentiment.
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