Forex Market Review – USDJPY jumps after Japan downgraded; sterling falls on lower CPI

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Euro reversed direction after a rally on late Monday and has turned bearish against the dollar again, falling in the European session. EURUSD opened the session at 1.2795 and hit an early high of 1.2806 before dropping to 1.2740.

 

However, losses are expected to be limited as investors are cautious ahead of a key EU Summit of European leaders on Wednesday. Some hope that policy makers could agree on measures to help tackle the euro zone debt crisis and ease concerns over Greek political turmoil and weakness in the Spanish banking system. French President Francois Hollande is expected to push for a joint-issue euro zone bond at the meeting in Brussels, but Germany, Europe’s largest economy, has so far opposed the move and prefers austerity measures to tackle the crisis.

 

 

Sterling fell sharply against the dollar and struck a two-week low against the euro after softer-than-expected inflation data increased the likelihood of more easing by the Bank of England to introduce more stimulus to support a flagging economy.  Meanwhile, the IMF called on the BOE to further ease monetary policy in an attempt to close the gap between actual and potential economic growth. GBPUSD fell to a session low of 1.5762 from an early high of 1.5847 before the inflation data was released. Pound fell against the euro, with EURGBP climbing to 0.8100 after the data, its highest level since May 4, from 0.8082.

 

 

Yen weakened sharply after Fitch Ratings announced it downgraded Japan’s sovereign ratings to A+ and issued a negative outlook on its credit rating, due to rising public debt levels.   USDJPY jumped to 79.83, up 0.5 percent from the session open level of 79.45. EURJPY rose to 101.92, before steadying, but well off a three-month low. The focus is on the Bank of Japan two-day policy meeting ending tomorrow. If the BOJ keeps policy on hold after easing last month, this could result in a rebound in the yen.

 

 

Gold fell further after the Fitch announcement, weighed as the dollar resumed a higher path and global stock markets rose. Spot gold prices touched a low of $1572.73 in the Europe session, down $20 from the Asian high.