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Market Calmly Anticipates BoE Governor's Speech

Major Events on the Economic Calendar (07/12/2015)

  • Japan- Bank of Japan Governor Kuroda Speech.         
  • EUR- Industrial Production n.s.a. w.d.a. (YoY) (Oct), / s.a. (MoM) (Oct).       
  • US- Labor Market Conditions Index (Nov) /BoE’s Governor Carney speech.      
  • Japan- GDP Annualized (Q3)/ (QoQ) (Q3) /Product Deflator (YoY) (Q3).           

The markets will spend the major part of this week taking in the events of last week while trying to prepare for the monetary policy decision from the Federal Reserve; this is expected to result in the first rise of interest rates in 10 years. With limited releases of data from the US and Europeans, attention will shift to Asia, predominantly China, where a number of key economic indicators will be released throughout the week. 

Asian Equities’ Effect on USD/JPY

So far, the Asian Equities’ effect has seen the USD/JPY pair trading at 0.15% higher at 123.30, testing session highs reached at 123.33. The major caught renewed bid tone after the yen fell further into losses following BoJ Governor's speech. Kuroda emphasized on the QQE program while speaking at the Paris Europlace Financial Forum in Tokyo, he noted the increasingly clear QQE effects on the financial sector and the stimulus effort is not financially risky.

However, the strengthening attributed to the USD/JPY pair can be also related to the US dollar gains across the board on persisting risk-on trades backed up by the resuscitation of Asian equities. Nikkei rallies 1.33%, while Australia’s S&P/ASX gains 0.15%.

The markets will try and assimilate the latest speech from Kuroda while keeping an eye on the views of the global equities. Although the market is not expecting any major economic data release today.

The prices tick higher in Asia and find the immediate resistance at 123.38 (4th Dec high). A break above this may see the major test 123.50/58 (3rd Dec high/ round number). On the flip sid: the immediate support placed at 123.06/123 (1h 100-SMA/ round number) below which 122.88 (1h 200-SMA) would be tested. 

A Look at Europe & the US

Apart from German industrial production and Eurozone Sentix investor confidence data, major economic data are not expected in the EUR calendar today.

Industrial production in Germany decreased 0 percent in October of 2015 compared with the same month in the previous year. Industrial Production in Germany averaged 1.53 percent from 1979 until 2015, reaching an all-time high of 14.80 percent in December of 2010 and a record low of -22 percent in April of 2009. Industrial Production in Germany is reported by the Deutsche Bundesbank.

Also, ECB Vice President Vitor Constâncio remarked that a "very large majority" of the governing council at the European Central Bank (ECB) voted in favour of the stimulus measures announced Thursday, according to the central bank's vice president, who has told CNBC that investor expectations had been wrong in the run up to the policy meeting. He stated that "We have to recognize that the markets got it wrong in forming their expectations. They did indeed have higher expectations than were there and that's why they reacted like they reacted but that was not our intention," ECB Vice-President, Vitor Constancio told CNBC in Frankfurt.

The highlight of the day is the BoE Governor Carney’s speech before the European Parliament Committee on Economic and Monetary Affairs in Brussels. This will be closely monitored for what to expect on the BoE interest rates outlook. 

Ahead of BoE Governor’s Speech

The market is patiently awaiting the Bank of England Governor Mark Carney’s testimony at the European Parliament Committee; taking place just three days before the announcement of central bank’s latest monetary policy decision. The market expectation is that no change is expected from the BoE on Thursday, this is due to Carney’s recent warnings about waiting for some time for the first hike, a totally different view from the central banks’ prior assessment where it made it look like a consideration of a hike by the year’s end.

Obviously, it is very clear that the BoE has got a difficult job on its hands as regards the decision of when it will begin the rate hiking cycle, considering the impact of the pound on the economy and the weakness of its largest export partners, my opinion is that the clear confusion within the central bank on the subject is coming across to the markets. The non-commitment of the BoE shows that they are no surer on the exact time the rates will rise.

Hopefully, Carney’s testimony may shed a lot of light on this but considering how the market reacts to information of this nature, I don’t see him giving away too much. Market expectation is that any move of that nature will have to wait until next year or 2017. Considering the good performance of the market, the middle of next year looks appropriate to me, even although this will be based on inflation returning to 2% in the medium term.  

Author: Wale Babalola

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