The GBP/JPY cross struggles for a firm intraday direction and oscillates in a narrow trading band, below the 197.00 round-figure mark through the first half of the European session on Tuesday. Moreover, the mixed fundamental backdrop warrants caution before positioning for the near-term trajectory amid mixed fundamental backdrop and thin trading volumes on Christmas Eve. 

The Japanese Yen (JPY) continues with its relative underperformance in the wake of the uncertainty over when the Bank of Japan (BoJ) will hike interest rates again. In fact, the Japanese central bank offered few clues on how soon it could push up borrowing costs at the end of the December policy meeting. Moreover, BoJ Governor Kazuo Ueda last week opened up the possibility of waiting longer for the next hike and said that the central bank will need a little bit more info on wage trends. This, along with a generally positive risk tone, continues to undermine the Japanese Yen (JPY) and acts as a tailwind for the GBP/JPY cross. 

Meanwhile, data released last Friday showed that Japan's core inflation accelerated in November and left the door open for a potential BoJ rate hike in January or March. Furthermore, speculations that Japanese authorities might intervene to prop up the domestic currency hold back traders from placing aggressive bearish bets around the JPY. Japan's Finance Minister Katsunobu Kato warned against excessive foreign exchange moves and reiterated earlier this Tuesday that the government is ready to act to stabilise the domestic currency. Apart from this, persistent geopolitical risks and trade war fears support the safe-haven JPY.

The British Pound (GBP), on the other hand, is undermined by the Bank of England's (BoE) split vote decision to leave interest rates unchanged last week and a dovish outlook It is worth mentioning that three members of the BoE's MPC voted to reduce rates. Moreover, policymakers downgraded their economic forecast for the fourth quarter of 2024. This might further contribute to capping the upside for the GBP/JPY cross. Hence, it will be prudent to wait for sustained strength and acceptance above the 197.00 mark before positioning for an extension of the monthly uptrend from the vicinity of the 188.00 round-figure mark.

Source: FXSTREET

EUR/JPY retraces its recent gains from the previous session, trading around 163.20 during the European hours on Tuesday. The EUR/JPY cross remains subdued following the release of the Bank of Japan's (BoJ) Meeting Minutes for October’s monetary policy.

BoJ board members highlighted the possibility of gradual rate hikes if inflation trends align with expectations, potentially reaching 1.0% by late fiscal 2025. The Meeting Minutes also underscored a cautious approach to monetary policy, focusing on wage-driven economic growth while addressing domestic and global uncertainties, along with fiscal measures to counter deflationary pressures.

Japan’s Finance Minister Katsunobu Kato stated on Friday that the government “will take appropriate action against excessive moves” in the foreign exchange market and will continue coordinating with international authorities on forex policies.

Last week, BoJ Governor Kazuo Ueda reiterated that the central bank would wait for further data to assess whether wage growth could maintain its upward momentum next year, aiming for greater clarity on economic trends.

The downside risks for the EUR/JPY cross is strengthened due to the subdued Euro amid rising bets of further rate reduction by the European Central Bank (ECB). Financial Times published an interview of European Central Bank (ECB) President Christine Lagarde on Monday, stating that the central bank is nearing its goal of sustainably bringing inflation down to the medium-term target of 2%. However, Lagarde stressed the importance of continued vigilance, particularly concerning inflation in the services sector.

On Saturday, ECB Governing Council member Boris Vujcic highlighted that the central bank plans to continue lowering borrowing costs in 2025, according to Bloomberg. “The direction is clear—it’s a continuation of the path from 2024, with further reductions in interest rates,” he said.

Source: FXSTREET

Formally, inflation figures and lower-than-forecast expectations helped the market to find ground for a rebound. However, the declines of the previous days may have broken the backbone of the bull market. A couple of technical signals indicate this.

Primarily, there is a series of 11 sessions of declines in the Dow Jones. This is one of the most sustained selloffs in the history of the index. The decline has not been particularly intense most of the time, except on 18 December when markets were pressured by a change in expectations from the Fed. This acceleration in the decline coincided with the index falling below its 50-day moving average, from which the index had been bouncing since August. On this indication, we can talk about the breaking of the medium-term uptrend, opening the way to the 200-day. It passes through 40800 and aims upwards to 41000 by the end of the year.

The S&P500 is fighting for the 50-day moving average, remaining below the 6000 level. In this case, the upward trend is not broken yet, as the market reaction to the relatively positive news on Friday brought the index back to its trend curve.

A similar technical picture is even stronger in the Nasdaq100, which was approaching the 50-day MA at its lowest point but bounced back impressively on Friday.

The outlook is most concerning for the Russell2000. This index of small stock market companies has erased all gains since the Republican election victory, losing over 10.5% from a peak in early December to a bottom last Friday. As in the Dow Jones, a break below the 50-day moving average accelerated the sell-off. This index is approaching its 200-day average (now at 2175). It has been trading above this curve since last December, making it an important support level: buying intensified as it approached it.

On a positive note, the Fear and Greed Index fell into the extreme fear area late last week. This is deep enough to provide a reset for the markets, but it is important to understand whether this is the start of a bear market.

So far, the stock markets have been unimpressive, and we cannot say whether the bull or bear camp is dominant. But by the end of the year, the picture will become clearer.

(Dec 24): Catastrophe-bond issuance rose to a record this year, increasing the overall market to almost US$50 billion (RM224.49 billion), as insurers transferred more risk from costly climate disasters to private investors.

Sales of bonds earmarked for supplemental coverage of large windstorms, earthquakes and other events totalled US$17.7 billion, up 7% from the previous record set a year ago, according to Artemis, which tracks the market for insurance-linked securities. The figures include cyber risk and private transactions.

“The cat-bond market had another year of strong growth,” said Tanja Wrosch, head of cat-bond portfolio management at Zurich-based Twelve Capital AG. “Larger, more diverse and deeper markets are key to the success and sustainability of cat-bond solutions and investment strategies.”

Cat bonds reward buyers for taking on insurance-market risk linked to natural calamities. If a predefined event occurs, bondholders can suffer hefty losses. If it doesn’t, they can earn double-digit returns.

Insurers and other issuers have become more eager to issue cat bonds, partly because of higher inflation, which has made it more expensive to rebuild properties destroyed in storms and other catastrophes. At the same time, insured losses have been rising as climate change stokes more extreme weather events. 

This month, Allstate Corp finalised the second-largest cat-bond deal in its history, obtaining US$650 million of reinsurance protection against storms, wildfires and other natural perils. The deal was about 86% larger than the initial target, according to Artemis.

Cat bonds continue to pay out more than many fixed-income assets. This year, investors are on track to earn returns of 16%, compared with a record 20% in 2023.

The yield on a catastrophe bond consists of a risk spread, plus the existing money-market fund rate. Investors have benefited from both attractive risk spreads and higher money-market yields of 4.5% to 5%, up from 0.25% or less during the pandemic.

There were sharp swings in the risk spread during 2024, partly because of sudden changes in the availability or scarcity of capital. It’s a market dynamic that’s growing in importance relative to underlying risk fundamentals, Wrosch said.

Twelve Capital expects the risk spread to be in the 5%-to-7% range next year. It was as high as 8.4% in 2024, according to data from Artemis.

Wrosch said cat-bond investors “can expect high single-digit to low double-digit gross returns” in 2025. Analysts at Plenum Investments AG, another Zurich-based cat-bond investor, are forecasting similar gains.

Cat bonds are designed to be shock absorbers for so-called tail events, which are rare but highly damaging weather-related disasters. Now, insurers increasingly want to use the securities to backstop rising losses from lesser but more-frequent hazards such as wildfires and thunderstorms. These events may have a modest impact individually, but they can cause large insured losses in aggregate.

While the scientific models underpinning so-called secondary perils have improved, they aren’t nearly as reliable as earthquake or hurricane models. That makes it harder to calculate risks. It remains to be seen whether cat-bond investors will be willing to bet on bonds that include aggregate losses, rather than bonds for single-occurrence events such as a Florida hurricane. 

“We still see investors showing a stronger preference for occurrence structures,” Wrosch said. “This is certainly true for us.”

Even so, the surge in aggregate losses is a dilemma the insurance industry needs to tackle. In a recent report, Twelve Capital pointed out that most insured losses from natural catastrophes won’t be from hurricanes this year but from wildfires, tornadoes, floods and other non-peak disasters — and they’ll exceed US$50 billion.

“Secondary perils remain very active with another year of heavy tornado and hail losses, in what may be a ‘new normal’ for this peril,” according to Twelve Capital.

Source: Theedgemarkets

EUR/USD closed marginally lower on Monday but the pair remained confined within a tight channel. The pair fluctuates near 1.0400 in the European morning on Tuesday as trading conditions thin out on Christmas Eve.

Euro PRICE Last 7 days

The table below shows the percentage change of Euro (EUR) against listed major currencies last 7 days. Euro was the weakest against the US Dollar.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).

Mixed macroeconomic data releases from the US limited the US Dollar's (USD) gains on Monday and helped EUR/USD find a foothold.

The US Census Bureau reported that Durable Goods Orders declined by 1.1% on a monthly basis in November, coming in worse than the market expectation for a decrease of 0.4%. Meanwhile, the Conference Board's Consumer Confidence Index fell to 104.7 in December from 112.8 (revised from 111.7) in November. On a positive note, New Home Sales increased by 5.9% in November following the 14.8% decrease recorded in October.

The economic calendar will not feature any macroeconomic data releases. Bond and stock markets in the US will operate half day on Tuesday and remain closed on Christmas Day on Wednesday.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart stays slightly below 50 but EUR/USD fluctuates at around the 20-period Simple Moving Average (SMA), highlighting a lack of directional momentum.

First resistance could be spotted at 1.0440 (static level) before 1.0490-1.0500, (100-period Simple Moving Average (SMA), static level). On the downside, 1.0350 (static level) and 1.0300 (static level, round level) could be seen as next support levels if EUR/USD confirms 1.0400 (static level, round level) as resistance.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Source: FXSTREET