Daily Market Digest: German Ifo, yen, pound

German Ifo business sentiment slips in April. Yen strengthens ahead of BoJ week, and the Pound Sterling looks more bullish.

Today’s Economic events

• Japan SPPI y/y 0.20% vs. 0.20%
• German Ifo business climate 106.6 vs. 107.1
• UK CBI Industrial order expectations -11 vs. -17

Coming up

• US new home sales

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German business confidence falls in April

Data from Munich-based Ifo institute gauging business sentiment in Germany released today showed a broadly weaker sentiment in Europe’s largest economy. The Ifo business climate index slipped to 106.6 in April following March’s increase to 106.7 while a measure of the current situation in Germany deteriorated as the index fell to 113.2 in April from 113.8 in March. The data follows last week’s flash PMI data released by Markit, which showed that Germany’s manufacturing and services sector had cooled in April.

The flash estimates along with today’s Ifo data give weight to the Bundesbank’s forecasts last week. The German central bank said that it expected to see momentum slowing down this quarter (Q2) following a strong expansion in the first three months of the year. While business sentiment might look bleak, investor sentiment, however, remains higher. Last week, the ZEW economic sentiment showed that investor confidence increases to the highest level in April on abating concerns over China as the ECB continues to expand its stimulus program.

“The overall sentiment measure declined despite a pickup in business expectations in April, indicating that the “moderate upturn in the German economy continues,” ~ Clemens Fuest, Ifo President

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Yen pulls back ahead of BoJ meeting

Although the Bank of Japan is slated to meet on April 28th, Thursday the Friday’s rumor sparked rallied showed signs of easing in today’s trading session. Following a session high to 111.75 on Friday, USDJPY briefly opened higher at 111.889 before slipping back, currently trading at 111.13. Investors anticipate that the Bank of Japan could further loosen monetary policy with expectations pointing to a 20 trillion yen easing to the QE purchases as well as expecting to see further rate cuts being employed. With last week’s CFTC data showing speculators’ net long positions on yen reaching the highest levels, Friday’s short squeeze on USDJPY was short lived. Earlier today, Bloomberg reported that the Bank of Japan increase its ETF holdings, indirectly purchasing Japanese stocks. It is estimated that the Japanese central bank is now among the top 10 shareholders owning close to 90% of the Nikkei 225 stocks.

Shingo Ide, chief equity strategies at NLI Research Institute in Tokyo said that “for those who want shares to go up at any cost, it’s absolutely fantastic that the BOJ is buying so much. But this is clearly distorting the sanity of the stock market“

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US President Obama urges Britain to stay in the EU

Britain’s ‘Stay’ camp got a boost with US President Barack Obama urging Britons to stay in the EU in an op-ed piece in the Telegraph, published on Thursday. He said that the EU only magnifies Britain’s influence and drew up parallels to the nuclear deal with Iran, Paris climate change and the US TIPP as examples of collective action. The President’s comments come as part of his visit to the UK. The British Pound has remained a firm footing as the cable notched two consecutive weekly gains, rising nearly 1.98% since the week starting 11th April.

From a technical perspective, GBPUSD could most likely make more gains following a break of $1.4498 – $1.4473, marking the inverse head and shoulders neckline resistance. A break above this level could see gains extending to $1.50 – $1.51. Adding to the bullish view is Nordea, which expects GBPUSD to strengthen to $1.46 – $1.48 in coming months. The bank adds “we may be getting to the beginning of the end of increasing the net shorts.” It notes that while UK’s large current account deficit is a reason to fear Brexit, it expects a weaker GBP in the short supporting exports. The bank also forecasts the Bank of England to start hiking rates within one year.

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Institutional Call of the day – EUR/GBP, Morgan Stanley^*

Morgan Stanley advises short positions in EUR/GBP at current levels and expects the euro to fall to GBP0.76 while noting stops at 0.8140. The British pound was seen trading stronger since last week with prices hitting a 6-week low at 0.7751.

In its note, MS says, “the risk supportive environment means that there is a potential for further upside in currencies that have large risk premia attached to them. It will take a large shock to the political environment to make GBP move away from how global EM and commodity-related currencies are trading.”

EURGBP (0.7769) is down 0.28% for the day.

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* Institutional Call of the day is not a recommendation or an endorsement by Orbex.com to buy or sell