Headlines

* Yen rebounds as BoJ to guide yield curve control with “greater flexibility”

* ECB’s Lagarde is preparing Europe for a hit to growth as the US soars

* Gold prices brace for biggest weekly decline in five on strong data

* Asia markets mostly lower as BoJ adjusts stance on YCC

FX: USD had a volatile session on a day with the ECB meeting, strong US data and post-the FOMC. The DXY tumbled to 100.55 before closing around 101.69. The 2-year yield eventually moved higher. The 50-day SMA at 4.85% is now support. The 10-year yield also surged north and is trading around 4%. The gap between the 2-year and 10-year yield reduced its inversion to the narrowest spread in two weeks. Upbeat US data indicated that the economy is heading for a soft landing and no recession.

EUR rose to 1.1143 before plunging to 1.0964. It finally closed near its lows at 1.0973. The ECB raised rates as expected but shifted to a more neutral bias from an explicit hawkish stance. The big bearish engulfing candle points to more downside.

GBP smashed through support as it closed near it slows below 1.28. Focus will turn to next Thursday’s BoE meeting. Markets are 70/30 on a 25pb rate hike over a bigger half-point move.

USD/JPY whipsawed this morning within a 302pt range. It has traded as high as 141.07 and down to a low of 138.05. During US hours yesterday, a hawkish Nikkei report flagged that the BoJ could switch to a more flexible approach on yields.

AUD declined amid a muted risk tone. Weak aussie retail sales and softer PPI data have pushed the major below the 200-day SMA at 0.6727. USD/CAD is trying to edge higher up to 1.3262. That’s the low form February and may offer initial resistance.

Stocks: US equities slid after the hot Q2 GDP report and tumbling initial jobless claims. The Nikkei sources piece also held back risk sentiment. The benchmark S&P 500 lost 0.64% to 4537. The open saw the index push above 4600 for the first time since March 2022. But a bearish engulfing candle warns of more potential downside.  The tech-dominated Nasdaq dropped 0.22%. The Dow snapped its 13-day win streak, down 0.67%. Meta closed up 4.4% after reporting an 11% rise in revenue. That marked the company’s most profitable quarter since 2021.

 Asian stocks were mixed with all attention on the shift in the BoJ’s YCC policy.  Chinese stocks gained after shrugging off initial weakness. There were further calls for China to support the tech industry and housing market. The Nikkei 225 underperformed with yields higher and markets spooked by the latest BoJ developments.

US equity futures are in the green. European equity futures are pointing to a lower open (-0.4%). The Euro Stoxx 50 closed up 2.3% yesterday. It hit its highest level since December 2007 as the ECB signalled it could pause rate hikes at its next meeting in September.

Gold tumbled 1.37%, its worst day since the start of June. Strong US data sparked a surge in Treasury yields and the USD. The BoJ YCC tweak is also aiding global bond yields. That hit the non-interest bearing precious metal. The 50-day SMA at $1946 is currently offering support.

Event Takeaway – ECB points to a pause, US data strengthens

After the relatively benign market reaction to the Fed, volatility was in full effect yesterday. Data dependency is the ECB’s new mantra. Inflation remains too high for too long. But there are signs of economic weakness. No September hike signal did for the euro which got sold aggressively, down 1% on the day. We have to go back to mid-March for a worse down day in the single currency.

US data also hit the world’s most popular major. A slew of strong numbers really accelerated the selling in EUR/USD. Q2 GDP growth, solid durable goods and a still-hot labour market all combined at the start of the Lagarde’s press conference. Rate differentials triggered the sharp USD rally. But the ECB did leave the door open to a hike in eight weeks’ time. All eyes will be on the flash eurozone core inflation numbers out on Monday. A sticky number will support EUR, though we have to wait until August 31 for the next report. Watch out for the US ECI released later today. Chair Powell mentioned this as in important input for the Fed.

Chart of the Day – USD/JPY whipsawing but lower

In a surprising move, the Bank of Japan decided to adjust its yield control policy. While the BoJ has maintained its guidance to allow the 10-year yield to fluctuate around the 0% target within a range of 0.5%, it now refers to these limits as “references” rather than “rigid limits.” This change in language has confused investors. The BoJ said it would offer to purchase 10-year Japanese government bonds at a fixed rate of 1.0%, up from the previous rate of 0.5%. This unexpected move has left investors pondering whether it is simply a technical adjustment to the yield-curve-control policy, or the start of a tightening cycle.

News of this change was reported yesterday evening. USD/JPY moved sharply and is aiming to close below 138. The 50% mark of the October decline is at 139.38. A long-term Fib level sits below at 136.66. The July low is just above here at 137.23 as first support.