Rocky risk sentiment remains as the BoJ meets.

Headlines

* Divided BoE keeps rates steady as past hikes start to bite

* Dollar edges up against the pound, euro on Fed support

* 10-year Treasury yield hits the highest level since 2007

* Philadelphia Fed survey prices paid component rises adding to inflation concerns

FX: USD popped up to a fresh high at 105.73 before giving back gains.  The Fed queried where the end, terminal rate is and it’s premature to consider easing. The shift higher in the yield curve is supporting the dollar. This will be the case until activity data which has been so resilient stalls. The long-term Fib level of the September 2022 decline at 105.38 remains resistance. The March high and year-to-date top is at 105.88. The index is on a knife edge as to whether it can post a very rare tenth straight week of gains.

EUR declined to a fresh low at 1.0616, a level last seen in March this year. But it clawed back its losses and finished in the green. Today sees the release of the September PMIs. They are expected to show ongoing subdued sentiment in the region. The main drag will come from Germany and France where service sector activity is weakening.

GBP had another hugely volatile day. Cable initially plunged on the surprise BoE pause decision. But it made back some of the losses after hitting lows seen in late March at 1.2233. UK retail sales and PMIs are released today. The former should be supported by a rebound from July’s bad weather. The survey data is forecast to remain in contractionary territory, which the BoE alluded to.

USD/JPY dropped the most in nearly 10 weeks. The bullish push higher on Wednesday could be a false break. Wider weak risk sentiment helped the yen. See below for more on the yen and BoJ.

AUD fell to 0.6385 before making it back above 0.64.  Markets priced in one rate hike by the RBA by May next year and no rate cuts at all next year. CAD pushed up to 1.3523 before holding around the 200-day SMA at 1.3460. NZD printed a doji candle denoting some indecision and a battle between buyers and sellers. Q2 GDP grew more than expected. The first quarter figure was also revised higher to flat. That meant there was no technical recession. Two-year kiwi yields jumped to the highest since 2008.

Stocks: US equities fell again on repercussions of the hawkish Fed which is hurting risk sentiment. One more hike and much less easing is the FOMC’s plan. This is meant to lead to a soft landing. Weekly initial jobless claims fell to a seven-and-a-half-month low. That showed continued labour market strength. The benchmark S&P 500 lost 1.64% to settle at 4330. The tech-heavy Nasdaq underperformed once more and finished 1.84% lower at 14694. The Dow outperformed, closing down 1.08% at 34,070. Megacap tech was under pressure as the US 10-year Treasury climbed to a new multi-year high. Amazon lost 4.41% and close to the 100-day SMA which it hasn’t touched since March.

Asian futures are deeply in the red. The Nikkei 225 retreated below 33k as Japanese yields climbed to decade highs ahead of the BoJ meeting.

Gold succumbed to rising yields. Sellers took the precious metal just below the 200-day SMA at $1924 which has been a pivot level.

Day Ahead – BoJ meeting and Japan CPI

The BoJ is fully expected to refrain from any policy changes. This comes after its more flexible approach to YCC curveball at the last meeting. That didn’t signal any major shifts in the bank’s uber dovish policies. But Governor Ueda recently got markets excited by saying the bank could exit from NIRP early next year. His focus was on a quiet exit. However, the BoJ would need to have sufficient data by year-end to say Japan has stably and sustainably achieved its price target.

The release of Japanese CPI is timely too. This is due to be released two hours before the BoJ announcement. The core is likely to tick lower to 3% from 3.1%. This would be in line with the Tokyo data.

Chart of the Day – USD/JPY backs off recent highs

The current weakness of the yen has been a key focus for markets as it remains in last year’s intervention territory. There is talk that Ueda could sound more hawkish in his press conference than he did in July. He could cite progress on inflation and possibly talk around further tweaks to the YCC policy in time. This would certainly help move USD/JPY lower.

Near-term resistance sits at 148.35/46. The 21-day SMA is just above 147 while the 50-day SMA resides near the late August low at 144.53. Last October’s top is 151.94.

(Sources: vantagemarkets.com)