USD/JPY

• USD/JPY falls from 133.85 to 133.36 on the day after Japanese authorities express concern about the rapid decline in the yen It’s not the first time such a reaction to more coordinated jawboning by Japanese officials has occurred, but the yen is seeing some shorts covered on the day, with USD/JPY falling from 133.85 to 133.36.
• For the time being, there is some minor resistance near 134.50, which has kept the pair from breaking higher this week, even though buyers are firmly targeting the 135.00 handle next.
• The day’s slight drop doesn’t suggest much, with minor support from yesterday’s low at 133.18 and the 100-hour moving average (red line) at 133.09 serving as key near-term defence levels to monitor.

ECB

• The ECB welcomes back an old friend
• The threat of fragmentation resurfaces The situation in Europe currently appears to be bleak. A looming energy crisis, exacerbated by the Russia-Ukraine conflict, adds to the deterioration of economic conditions caused by rising inflationary pressures.
• And now you can bring up the subject of a debt crisis once more. ECB President Lagarde failed to address any concerns about eurozone fragmentation yesterday, prompting the central bank to welcome back an old friend as it prepares to tighten monetary policy for the first time in more than a decade.
• It occurs when the ECB’s monetary policy effects are not felt equally across all Eurozone countries, resulting in significant widening in spreads, indicating a disconnect from the economic backdrop. As a result, the widening of the BTP-Bunds yield spread is an important indicator to keep an eye on. The reason why the effects will not be equal lies at the heart of how the Eurozone framework is built, which is a separate issue.
• At the height of the European debt crisis in 2012, then-ECB President Mario Draghi famously coined the phrase “whatever it takes” in order to reduce the blow up in spreads at the time.
• The obvious point to make is that the ECB has begun to tighten policy again for the first time in more than a decade. Bonds will fall in value as the Fed shifts policy and prepares to stop purchasing assets.
• While the 10-year BTP-Bunds yield spread hasn’t blown up to levels seen during the height of the previous debt crisis, the fact that the ECB lacks a game plan and may struggle to find a solution is reason enough for bond markets to feel jittery.
• ECB President Lagarde previously stated that they are “not here to close the spreads” and that markets can “test our resolve as much as they want.
• ” While rising yields from the ECB’s tightening policy appear to be a tailwind for the euro, the widening of spreads ultimately signals risks to financial stability, which will be a major headwind for the single currency.

Dollar

• Markets continue to wait for the release of US inflation data later in the day.
• There isn’t a lot of conviction in markets right now, but there are some light moves in European morning trade.
• The dollar is remaining mixed, with the euro and pound under pressure against the greenback, with the latter receiving little assistance from the ECB yesterday.
• There is a lot of market talk about fragmentation risks, and it’s not going away anytime soon.
• This has also dragged down European stocks, despite the fact that US futures are looking more tepid.
•  European indices are down more than 1% across the board, with Italy’s FTSE MIB leading the way, down more than 2.7 percent as the BTP-Bunds spread rises.
• The EUR/USD has now been dragged to session lows, pushing towards 1.0590 as sellers seek to solidify a drop below the recent consolidation range.
• The pound is also down 0.3 percent to 1.2450, testing daily support near 1.2458-71, with the week’s low at 1.2430 also a key support level to monitor. Meanwhile, the USD/JPY has recovered its earlier loss, pushing back up to 133.90 levels.
• It all depends on how markets digest the US inflation data later, but yesterday’s jitters will not be forgotten before the weekend.

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