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The yen managed to edge out a win against the Greenback, which made the safe-haven yen the best-performing currency of the morning London session, even though risk-taking raged during the session.

As for other currencies of note, we have the pound and the euro, since the two European currencies were in a race to the bottom of the forex heap.

  • German final HICP m/m: unchanged at 0.8% as expected
  • German final HICP y/y: unchanged at 1.6% as expected
  • U.K. CPI m/m: 0.4% as expected vs. 0.3% previous
  • U.K. CPI y/y: 3.0% as expected vs. 3.1% previous
  • Core U.K. CPI y/y: 2.5% vs. 2.6% expected, 2.7% previous
  • HPI in the U.K. y/y: 5.1% vs. 4.2% expected, 5.4% previous
  • U.K. PPI input m/m: 0.1% vs. 0.4% expected, 1.6% previous
  • U.K. PPI output m/m: 0.4% vs. 0.2% expected, 0.4% previous
  • Italian trade balance: €4.83B vs. 5.22B expected, €4.99B previous

Major Events/Reports

U.K. CPI eases year-on-year

The U.K.’s December CPI report was released earlier and it shows that CPI rose by 0.4% month-on-month, which is within expectations and faster than November’s reported 0.3% rise.

Year-on-year, this translates to a 3.0% increase, which is also within expectations. However, the reading is a tick slower compared to the 3.1% increase printed in November. Not only that, this is also the first downtick ever since annual CPI kept picking up the pace since June 2017.

Despite the downtick, this marks the 11th consecutive month that CPI has been above the BOE’s 2.0% target. Moreover, December’s annual +3.0% reading is above the BOE’s staff forecast of +2.7%  as laid out in the BOE’s November Inflation Report.

Even so, market analysts say that traders are supposedly more focused on the downtick, which is interpreted to mean weaker pressure on the BOE to hike.

After all, the BOE did note during the December BOE Statement that the “MPC continued to judge that inflation was likely to be close to its peak, and would decline towards the 2% target in the medium term,” which only warrants rate hikes at a “gradual pace and to a limited extent.”

Looking at the details of the CPI report, 7 of the 12 CPI components reported weaker annual increases.

And of the five CPI components that showed a stronger rise, the 5.6% rise in the cost of alcoholic beverages and tobacco was one of the bigger drivers (+4.5% previous).

However, that CPI component is stripped from the core reading, which is why the core reading took a harder hit (2.5% vs. 2.6% expected, 2.7% previous) compared to the headline reading.

German coalition talks hit a snag

Germany’s Der Spiegel was the first to break the news earlier that members of the center-left Social Democrats (SPD) from the Berlin region voted against pursuing grand coalition talks with German Chancellor Angela Merkel’s conservative Christian Democrats (CDU).

It should be noted, however, that other regions have yet to vote. Moreover, the real vote will be this Sunday (Jan. 21) during the SPD Party Congress.

In addition, Berlin’s vote only represents 23 delegates out of the 600 that are expected to meet during the SPD Party Congress, so this is not a game breaker for the euro… yet. Even so, the euro reeled from this disappointing news.

ECB-related rumors

According to a Reuters report that cited “three sources close to the matter,” the ECB members supposedly “need more thorough analysis before making any change.”

This is within the context of expectations that the ECB may change its tune in next week’s ECB statement after last week’s hawkish ECB minutes opened the possibility of a change in tune in the ECB’s monetary policy stance and forward guidance when the minutes noted that:

“The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.”

Anyhow, these unnamed sources said that the March ECB statement would be the more likely time to communicate a change in tune.

Risk-friendly vibes in Europe

Sentiment in Europe improved during today’s morning London session after a gloomy bout yesterday, so the major European equity indices power their way higher during the session.

And according to market analysts, the risk-on vibes in Europe were largely due to positive earnings and sales reports for European companies.

  • The pan-European FTSEurofirst 300 was up by 0.31% to 1,570.68
  • Germany’s DAX was up by 1.04% to 13,337.50
  • The blue-chip Euro Stoxx 50 was up by 0.43% to 3,633.50

U.S. equity futures also enjoyed the risk-on vibes

  • S&P 500 futures were up by 0.47% to 2,801.75
  • Nasdaq futures were up by 0.59% to 6,815.25

Global bond yields plunge

Despite clear signs of risk-taking in the European equities and U.S. equity futures markets, global bond yields dropped hard as demand for bonds, European goverment bonds in particular, ramped up.

Market analysts attributed the slide in global bond yields on investors paring back expectations that the ECB will be tightening policy soon. Although troubles with SPD and German coalition talks were also cited as having a dampening effect on European bond yields.

  • German 10-year bond yield down by 5.10% to 0.558%
  • French 10-year bond yield down by 3.40% to 0.835%
  • U.K. 10-year bond yield down by 1.74% to 1.301%
  • Spanish 10-year bond yield down by 2.55% to 1.488%
  • Italian 10-year bond yield down by 2.71% to 1.942%
  • U.S. 10-year bond yield down by 1.01% to 2.526%
  • Canadian 10-year bond yield down by 1.19% to 2.164%

Major Market Mover(s):

JPY

The safe-haven yen outpaced the resurgent Greenback to come out on top during the morning London session.

Interestingly enough, risk-taking was clearly the name of the game in the European equities and U.S. equity futures markets. However, global bond yields were down hard and the yen was likely taking directional cues from those.

USD/JPY was down by 11 pips (-0.11%) to 110.71, AUD/JPY was down by 13 pips (-0.15%) to 88.01, NZD/JPY was down by 10 pips (-0.12%) to 80.52

GBP

The pound tossed and turned when the U.K.’s CPI report was released. However, it soon became apparent that bears had the upper hand, and so the pound closed lower pretty much across the board, apparently because traders were more focused on the downtick in annual CPI and the miss in the core reading, since those were seen as supporting the idea that the BOE is in no hurry to hike rates since CPI is expected to ease during the course of the year.

GBP/USD was down by 24 pips (-0.18%) to 1.3762, GBP/JPY was down by 29 pips (-0.19%) to 152.36, GBP/CHF was down by 15 pips (-0.11%) to 1.3269

EUR

The euro got hammered about an hour before the London session rolled around, thanks to reports that Berlin SPD members voted not to support coalition talks with Merkel.

Dip buyers were notable, but even they could not stop the influx of fresh sellers when Reuters released its ECB-related report that I mentioned earlier.

EUR/USD was down by 36 pips (-0.30%) to 1.2231 based on pre-London open, EUR/JPY was down by 54 pips (-0.40%) to 135.36 based on pre-London open, EUR/CHF was down by 29 pips (-0.25%) to 1.1793 based on pre-London open

Watch Out For:

  • 1:30 pm GMT: Empire State U.S. manufacturing survey (19.0 expected, 18.0 previous)
  • 2:30 pm GMT: CB’s U.K. leading index (-0.2% previous)
  • 5:00 pm GMT: SNB Boss-Man Thomas Jordan will be speaking
  • Dairy auction currently underway (2.2% previous); auction usually ends at around 2:00 pm GMT