ECB Seems To Have Limited Options (EUR/USD), Concerns In UK Bond Market (EUR/GBP), JPY Drops To 1990 Lows (USD/JPY)

Summary:

• Markets are betting on a 90% chance that ECB will enforce another 75bp hike.
• GBP's impressive run came to an abrupt end.
• JPY dropped to lows last seen in August 1990.

ECB seems limited in their options

The market is reflecting bullish signals for this currency pair. The European Central Bank (ECB)'s are limited in their options in light of the most recent CPI reading. The ECB's case for continuing to raise rates in pursuit of its 2% target may be strengthened by today's stronger ZEW statistics. The concern is that by doing this, the central bank could risk sending the economy back into a recession, which would be indicated by the dropping ZEW current conditions print. On the other hand, if the central bank does nothing, the euro may lose further ground to the dollar. The final CPI report on Wednesday and today's data print will be crucial as the ECB begins its pre-meeting blackout period on Thursday. As the central bank works to achieve its 2% target, markets are putting in a 90% chance that there will be another 75bp increase at the meeting next week. We will hear from ECB policymaker Isabel Schnabel later in the day. She is anticipated to maintain the rhetoric of rate increases despite the fragility of the Eurozone economies.

✕ EUR/USD Price Chart

Concerns in UK bond markets

The market is reflecting mixed sentiment for this currency pair. Following some fresh concern in the UK bond markets on Tuesday, the British Pound's impressive run came to an abrupt end. Following the Bank of England's forced denial that it would further delay its program of quantitative tightening, UK gilts declined and the yield they offered increased. After the recent instability in the bond market, The Financial Times reported on Tuesday that the Bank was prepared to postpone the program. After reaching a high of 1.1576 earlier in the day, the exchange rate between the British pound and the euro dropped to 1.1490. This brings the rates for bank transfers to around 1.1260 and the prices provided by payment specialists to around 1.1450.

✕ EUR/GBP Price Chart

JPY continues to lose against the USD

The market is reflecting bullish signals for this currency pair. Earlier in the session, the Japanese Yen dropped to lows last seen in August 1990 as it continues to lose value against the US dollar. Little has changed for the Yen as Japanese authorities appear ready to allow the currency to continue to decline by controlling bond yields. The yield on 10-year JGBs is restricted to 0.25%. In contrast, as the Fed keeps raising interest rates, US Treasury yields continue to trade at or close to multi-year highs. The benchmark 10-year UST is quoted with a yield of 4.00%, which is approximately 375 basis points higher than the comparable JGB. The rate-sensitive 2-year UST trades with a yield of about 4.45%.

✕ USD/JPY Price Chart

Sources: finance.yahoo.com, poundsterlinglive.com, dailyfx.com