The Japanese yen pared back much of this week's losses as stocks pulled back from record highs and is being supported by strong GDP reading. DOW and S&P 500 lost some ground by dropping -101.47 pts and -8.92 pts respectively after making historical close earlier this week. Asian equities followed and are trading mildly in red. Data released from Japan showed sharp increase of 1.5% qoq in Q1. The annualized, seasonally adjusted growth rate was an impressive 5.9%. Economists noted that rush purchases ahead of the April sales tax hike boosted Q1 GDP as expected. In particular, consumption on durable items was notably strong. BoJ governor Kuroda said today that business are making smooth progress in passing the April's sales tax hike to consumer. And, lending to small business has turned positive. He remained confident that inflation will hit 2% target in fiscal 2015. Technically, yen crosses are rather mixed. Clear weakness is seen in the EUR/JPY and GBP/JPY. The USD/JPY is stuck in range with a bearish outlook. But, the AUD/JPY is bounded in range with a bullish outlook.
European majors remain the weakest currencies this week. Bundesbank chief Weidmann said yesterday that it's "prepared" to support the ECB's action. He noted that he's not isolated in the ECB's governing council and ""if there is a need to act in terms of monetary policy, then the Bundesbank is also ready." But, he rejected the ideal of a QE program as that's "not suitable to deal with the problem of current inflation rates." It's widely reported that the ECB is preparing a package of policy actions for June meeting. That would include cutting in all three interest rates, with deposit rate pushing to negative, as well a targeted measures to boost SME lending.
The Sterling also remained weak after yesterday's BoE inflation report. The BOE in its quarterly inflation report indicated that while the level of spare capacity in the economy had 'narrowed slightly' in the past 3 months, there 'remains scope to make greater inroads into slack before raising bank rate'. It also signaled that rate hike would not come at least until second quarter of next year. Under this assumption, the central bank forecast inflation would stay close to the 2% target over the next 3 years. In the near-term, inflation would reach 1.8% this year and in 2015, before accelerating to 1.9%. The GDP would reach 3.4% this year but then ease to 2.9% in 2015. On monetary policy, while the BOE indicated that the likely timing for the first rate hike, from a record low of 0.5%, would be next year. More in BOE Not Urgent To Hike Rates, Whilst Acknowledging Tightening Soon Needed.
The situation in Ukraine is an important item to pay close attention to. In Kiev, the Ukrainian government held round-table talks on "national unity" on resolving the Ukraine crisis. Yet, no representatives from the rebellious south-eastern regions were invited. Regarding this, Russian Parliament Speaker Sergei Naryshkin the refusal to include the rebel in the talks would undermine the legitimacy of the presidential election. According to him, "it's hard to imagine that this election could be fully legitimate" but "it's obvious that the failure to hold the election would lead to an even sadder situation, so it's necessary to choose the lesser evil". Yet, Russia's foreign minister, Sergei Lavrov, warned that civil war is on the brink and there's no way of having free and fair elections under this situation. According to him, "in east and south of Ukraine there is a war, a real war, with heavy weaponry used. And if this is conducive to free and fair elections then I don't recognize what free and fair is".
Looking ahead, Eurozone GDP will be the main focus in European session. France, Germany, Italy and Eurozone will release GDP figures respectively. Eurozone will also release CPI final. Swiss will release PPI. In US session, US CPI, jobless claims, regional manufacturing data, industrial production, TIC capital flow and NAHB housing index will be featured. It's a busy day.