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The BoJ cuts Japanese GDP growth expectations and keeps rates unchanged.

Today is a more packed economic calendar day with the London session starting risk-off. This early signal could mean we get further consolidation in the major pairs until this afternoon’s US data but also a further drop in the energy and equity markets. Any surprises out of the ECB policy meeting will be around how soon or late, they feel they can raise rates. Any delay will be bearish for the euro.

Market Brief

At its October meeting, the Bank of Japan left its key short-term interest rate unchanged at -0.1% and kept the target for the 10-year government bond yield at around 0%. The BoJ slashed its GDP outlook for 2021 from 3.8% to 3.4%, mentioning slow consumption, exports, and output as supply disruptions persisted. The short-term interest rate target will remain unchanged at -0.1% and the 10-year JGB yield target was set at around 0%. To achieve this the bank will buy any amount of Japanese government bonds necessary. The Nikkei225 is currently consolidating under a level of resistance, so a break below the swing low of 28380 would open prices towards October's lows. Traders looking to go long the index should wait for a break above the resistance level of 29,500 and wait for a retest to confirm the level is acting as support.

The USDJPY is currently trading within the price range from yesterday and of late the benchmark US yields and USDJPY have been tracking each other. The move lower in US yields yesterday and the BoJ decision today have strengthened the yen against the US dollar but there still could be demand at 113.00. A break below the recent swing low would open up a larger decline to market structure around September's swing high and the 112.00 price level.

Oil prices extended their losses in the Asia-Pac session before undoing some of the moves into the London open. Both the Brent and WTI contracts dropped over 1% amid growing concerns about the future demand for crude. Besides an increase in crude inventories in the United States, COVID-19 infections also contributed to US oversupply woes. The USA has reached 400 million vaccination jabs in 9 months, which was a target for the Biden administration.

For commodity traders, it may be time to short the energy complex and go along with the precious metals. Yesterday, US 10-year Treasury yields dropped below 1.6% for the fourth consecutive day, while the 10-year Bund hit a week-low. There is an inverse relationship between the US Treasury yields and the precious metals and with long bond yields coming down and the flattening of the yield curves, future inflation worries are diminishing. The US dollar could also be lower if the benchmark yields come lower, which would be supportive for the gold prices too.

Today is the ECB’s turn to announce its monetary policy. European interest rates and asset purchases are expected to remain the same, though analysts will be keen to learn more about the future of their PEPP scheme. If there is talk of a delay to the rate hike by the end of 2022, this could be bearish for the euro today. Currently, the EURUSD is going sideways and hugging the 1.1600 level. The FOMC meeting next week will be the catalyst for a longer-term move when they give forward guidance on their rate hike policy and the expectations will be for a greater rate divergence between the two currency pairs.

Following on from the UK Budget announcement yesterday the GBPUSD has found support at the daily moving averages, so a weaker US dollar this afternoon could give the pound enough momentum to get above some previous day’s highs, with 1.3835 the most significant level for the bulls to target.

Later today the economic calendar includes US Advanced GDP. In Q3, the US economy expanded by 2.7% on an annualized rate, a significant decrease from Q2. This is primarily due to a rise in the number of covid cases over the quarter. There will also be the latest IJC report detailing last week’s jobless claims.

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