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Watching the yen

The yen has strengthened overnight to push to 5 week lows on USDJPY. Inflation data was broadly in line, with prices rising 3.7% on an annual basis. Recall that this has been boosted by the consumption tax increase which took effect earlier in the year. The 21st May low of 100.82 is now in focus, with this seen a strong area of support, together with the early Feb low of 100.76. The risk is that we see some further covering of yen shorts into month end as more short positions are forced to bail out.
Yesterday’s story was with sterling and the measures announced by the Bank of England’s Financial Policy Committee to take the heat out of the housing market. As it was, these were designed to act as a constraint on further excesses in lending, rather than acting as a brake on current activity or the economy. Sterling took the announcement well and it also acted as a sign that the Bank is becoming a little more active on the policy front.
For today, the fact that Monday is month and quarter end could well cause some greater volatility in markets. Data distractions come in the form of final GDP data in the UK, together with economic and consumer confidence in the eurozone. Sterling is still one to watch, given that there is a greater vulnerability to profit-taking after the gains seen this month, especially if sterling holds above the 1.70 level on cable. The commodity currencies could also be vulnerable for similar reasons (AUD, NZD and CAD), all having performed strongly this month.

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