At today's meeting, the Bank of Japan changed the balance of risks for inflation in the forecast towards neutral, however, it barely raised its inflation forecast, which will likely be regarded as a lack of urgency to raise the rate. In the case of more signals from the Fed related to policy tightening, the yen is the first to succumb to a strong dollar. A strong report on the UK labor market raised the chances that the February meeting of the Bank of England will be held under the banner of policy normalization. Dull economic calendar and sense of anxiety in stock markets is expected to allow the dollar to test the key nearby resistance level - 95.5 on DXY.
The data worth paying attention today relates to the US economy - this is the industrial Empire index, data on purchases and sales of Treasuries by foreign investors (the so-called TIC Flows), as well as data on home sales. However, their impact on asset prices is likely to be limited. Market participants are beginning to gear up for next week's FOMC meeting, which was mainly reflected in completed pullback and bullish breakout in 10-year yield of the January high of 1.80%, after which the sell-off accelerated, propping up USD demand:
The ZEW report on the German economy showed that Omicron's influence on the economy stabilized in January - the sentiment index exceeded the forecast and amounted to 51.7 points. This fact made little impression on the euro, as now the movement in the pair is formed by expectations related to the dollar and the upcoming Fed meeting. However, the prerequisites for a hawkish shift in the ECB's policy are slowly building up as prospects for persistently high inflation in coming months or moving to even higher levels appear to be solid.
Markets shrugged off a strong UK labor market report as GBPUSD plunged below 1.36 on the back of broad-based dollar strength. However, tomorrow's inflation report may support the British currency and a convenient level for an upward correction is the level of 1.355, where the upper limit of the previous downward channel resides:
However, closer to the FOMC, the downward movement is likely to resume and the level of 1.3550 can serve as a selling point. In turn, for EURGBP, downward movement is also a priority, in particular, it is worth considering the idea of a breakthrough of the level of 0.83 and sell-off toward 0.8250.