The latest Japanese GDP data was weaker than expected with a 0.3% fourth-quarter increase compared with a 0.7% forecast. The subdued data will increase pressure for further monetary action by the Bank of Japan and there were reports that the central bank would not issue a 2015 monetary-base forecast to give more policy flexibility which could also increase yen volatility. A more cautious tone towards risk, however, initially underpinned the yen as USD/JPY tested support below 101.50 before rebounding back towards 102.00 later in the European session.
The latest CFTC data recorded a small decline in long speculative dollar positions, but there was still a substantial long position and a net short Euro position which will limit the potential for a dollar recovery. EUR/USD continued to probe resistance above 1.37 on Monday with a peak just below 1.3725 before being subjected to profit taking.
As expected, Renzi was handed the presidential mandate to attempt to form a new Italian government following Prime Minister Letta’s resignation on Friday. The immediate market impact was very limited with no evidence of stresses in Italian bonds as sentiment was supported by Moody’s return of Italy’s credit rating to stable from negative.
Markets struggled to gain any momentum during the bulk of Monday with no significant economic releases on the calendar with activity also dampened by a US market holiday. EUR/USD maintained a tone of consolidation, backing away from levels above 1.3710 but, equally, bears were unable to generate any significant selling on the downside with immediate support just below 1.37 as USD/CHF looked to hold just above the 0.89 level.
Sterling had again been the stand-out performer on Friday and GBP/USD surged higher again in Asia with a peak above 1.68 and the highest level since the third quarter of 2009. Sterling was increasingly overbought following last week’s surge and was finally subjected to a sharp correction with a retreat back to 1.6720. EUR/GBP also found support below the 0.8160 level and moved abck to the 0.82 level.