The situation on the markets on May 26 – Inflation in Japan begins to decline?

The inflation rate in May decreased slightly to 3.2 percent. O/O 3.5% YoY (expected to increase to 3.9% YoY). We were also surprised by the lower reading in the case of core inflation excluding food prices – falling to 3.2 per cent. o/o 3.5 percent o/o with an expectation of 3.3 percent. r / y, but the so-called hyperbase inflation, that is, calculated excluding fresh food and energy – here it accelerated to 3.9 percent. Annually 3.8 percent o/o, although it was a reading in line with expectations. However, this is the highest level in 40 years! Is this a concern for the Bank of Japan? At the moment, decision makers (Minister Suzuki is already active) are concerned about the weakness of the yen (USDJPY broke 140.00 yesterday), although the Bank of Japan is not entirely comfortable because many central banks use the baseline as a leading indicator for valuation. inflation trends. What then?

Economists seem divided on the changes, though they note that June or July may be a good time to report some changes. Will it be “tinkering” with the YCC (yield curve control) software? Today, President Ueda admitted that the central bank could consider switching from YCC 10-year notes to 5-year notes in their scenarios, which would allow them to better manage short-term expectations. Only, wouldn’t such an operation be too risky for the central bank itself?

The yen is strengthening slightly today – USDJPY is back below 140.00. The topic of discussion in the markets remains the issue of the US debt limit, as we are still waiting for some compromise. Reports may indicate that the Republicans have softened their resistance somewhat, although this may be disingenuous due to the hardening stance of the “Trumpist faction”. However, the dollar is correcting slightly in the broad market today after gains in recent days. This could be influenced by the good mood on Wall Street after the recent frenzy around tech companies (NASDAQ crossed 14,000 yesterday).

Among the G-10 currencies, the Swedish krona is the strongest, followed by the yen, franc, and pound sterling. In the case of the British currency, it is worth noting yesterday’s “hawkish” comment by a BoE member (Haskell), who reaffirmed the markets’ belief that it was right to price in up to 100 basis points in interest rates. This year (because of the very slow decline in inflation). The euro and the New Zealand dollar remain the most stable (the latter does not even have the strength to bounce back after a strong decline in recent days in response to reports from the Reserve Bank of New Zealand).

Today on the calendar we mainly have data from the US regarding the Core PCE (14:30 CET) and Univ Consumer Confidence. Michigan (16:00).

EURUSD – Will it continue?

EURUSD stalled (pause?) after a few days of decline. Markets are wondering how good the turmoil around the US debt limit will be for the dollar, as there is already more pressure on US debt (bond yields going up). In the case of the euro, we received a “hawkish” comment from the ECB’s Claes Fudge, who emphasized that core inflation showed no signs of slowing and that there was no reason to end the cycle of rate hikes. However, Fudge is a bit like the ECB’s Fed Bullard and doesn’t seem to represent the majority opinion. In any case, after yesterday’s disastrous data from Germany, attention has now turned to the release of inflation estimates for May next week, which will give clues about the likely end of the ECB’s rate hike cycle in June or July at the latest.

EURUSD daily chart

Technically, EURUSD has more reason to continue lower, although the first bands generated by the move from around 1.11 have already materialized. Strong support for next week is the 1.0650 area where the multi-month trendline extends. End of month probably will bring some bounce – then strong resistance will be around 1.0830.