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Earlier today the Bank of Japan announced that it would taper its Japanese Government Bond purchases. The ‘taper’ reduces the size of 10 to 25-year debt from ¥200 billion to ¥190 billion and +25 year bonds from ¥90 billion to ¥80 billion. It’s unclear if this will be carried through to the next purchase or if it is a one day only event. Inflation has yet to meet targets and there is no mention of a policy change from the BOJ. Today’s reductions are small but had a big impact on USDJPY which fell from 113.153 to a low of 112.493 overnight.

Swiss Consumer Prices Index (YoY) (Dec) was out as expected, unchanged from the previous value of 0.8%. Consumer Price Index (MoM) (Dec) was released at 0.0% v -0.1% expected, from a prior reading of -0.1%. USDCHF was higher from 0.97685 to 0.97831.

Eurozone Business Climate (Dec) was released at 1.66 v an expected 1.51, while the previous number was 1.49. Also at this time, Consumer Confidence (Dec) was as expected, unchanged at 0.5. Industrial Confidence (Dec) was 9.2 v 8.4 expected, while its prior was revised from 8.2 to 8.1. Services Sentiment (Dec) was 18.4 v 16.5 expected, while 16.3 previously was revised up to 16.4. Economic Sentiment Indicator (Dec) was 116.0 v an expected 114.8, from 114.6 previously. EURUSD rallied from 1.19892 to 1.20032 after this data release.

Bank of Canada Business Outlook Survey Indicator data was released at 15:30 GMT and came in at 2.49 v an expected 0.83. Future Sales were 8.0 v 19.0 prior. Data points were positive overall and USDCAD rose to a high of 1.24480 but then fell to a low of 1.24000.

US Consumer Credit Change (Nov) was $27.95B from an expected $19.75B and the prior of $20.52B was revised up to $20.53B. USDJPY moved higher to 113.122 upon release.

EURUSD is down -0.09% overnight, trading around 1.19568.

USDJPY is down -0.35% in the early session trading at around 112.690.

GBPUSD is up 0.04% to trade around 1.35681.

USDCAD is down -0.07%, trading around 1.24100.

Gold is down -0.15% in early morning trading at around $1,318.40.

WTI is up 0.34%, trading around $62.15.

Major data releases for today:

At 06.45 GMT, Swiss Consumer Prices Index (YoY) (Dec) is expected to come in unchanged at 0.8%. Consumer Price Index (MoM) (Dec) will also be released, with a prior reading of 1.5%. Swiss Franc pairs may see price movement if the data released varies from the consensus.

At 07:00 GMT, German Trade Balance s.a. (Nov) is expected to be 20.9B from a previous 19.9B. Exports (MoM) (Nov) are expected at 1.2% from -0.4% previously. Imports (MoM) (Nov) are expected at 0.8% from 1.8% prior. Current Account n.s.a. (Nov) is expected at 25.5B v a prior reading of 18.1B. EUR pairs may react to this data.

At 08:00 GMT, ECB Non-monetary policy’s meeting will take place. Any headlines from this meeting will be scrutinised for advance notice of policy decisions.

At 08:00 GMT, Swiss Real Retail Sales (YoY) (Nov) will come out. The consensus is -2.5% and the previous number was -3.0%.

At 10:00 GMT, Eurozone Unemployment Rate (Nov) is expected at 8.7% v a prior of 8.8%. Euro pairs could experience movement if the data differs from the consensus.

At 13:15 GMT, Canadian Housing Starts s.a (YoY) (Dec) is expected at 212.5K from a prior of 252.2K. CAD pairs will be exposed to this data release.

At 15:00 GMT, US FOMC Member Kashkari will be speaking, which may affect USD crosses, stocks, commodities and bonds.

Led by Wall Street, global equity markets continued to enjoy one of their best starts in eight years. The Japan’s Nikkei 225 marched to a new 26-year high after the S&P 500 and Nasdaq Composite set record closes in the previous session. In Europe, the FTSE 100 made a new high on Monday before retreating slightly to close 0.36% lower, meanwhile the German Dax is only 1.2% shy of its all-time peak, reached in October last year.

There’s no reason not to be optimistic when global growth is expected to run above average; inflation remains muted, and U.S. tax reforms are driving up U.S. corporate profits forecasts at the fastest pace in more than a decade.

Many skeptical equity investors are not willing to call the end of the bull market, given that contrarians who challenged common market beliefs in 2017 missed the rally. However, this doesn’t necessarily mean there is no reason not to be worried.

From a valuation perspective, few can argue that stock valuations, particularly in the U.S.are overstretched, despite the upgraded earnings forecasts. When looking at the cyclically adjusted price-to-earnings multiple “CAPE”, it is currently above 33, a level last seen during the dot-com bubble. However, this indicator has been suggesting that stocks are expensive for the past two years, but there are still no signs of the bulls giving up. This is due to the low-interest rate environment, which wasn’t the case in 2000 or 1929.

The 45% rally in the S&P 500 during the past two years has driven down dividend yields to below 1.9% which is now lower than the returns on 2-year treasury notes. At the moment it appears that investorsare not too worried about rising short-term interest rates, but the outlook will likely change when yields in the longer term start to increase.

Today the Bank of Japan announced a reduction of buying JGBs by 20 billion yen. Although it’s considered a slight tweak in monetary policy, this may mean that further tightening is on the cards, despite BoJ’s Kuroda signaling at December’s meeting that no monetary policy tightening was imminent.

I expect to see further actions from major central banks to tighten policy through reducing stimulus and raising interest rates, as low inflation will not last forever. Such actions will likely lead to rapid appreciation in bond yields across Europe and the U.S. which could be the first signal of an equity market correction.

The British pound has started to trade below the key 1.3550 level against the U.S dollar, as the greenback starts to regain upside traction across the board. The GBPUSD pair earlier failed to make a new daily-high above the yearly trading high, found at 1.3613, encouraging traders to turn their attention towards the downside. Price-action currently sits around the 1.3540 level, after an earlier battle between buyers and sellers around the pivotal 1.3550 level. Headed into the U.S session, the directional bias of the U.S dollar index will likely dictate the pairs intraday price movements.

The GBPUSD pair is intraday bearish below the 1.3500 level, key downside targets remain 1.3500 and 1.3467.

Should price-action on the GBPUSD pair trade above the 1.3550 level, attention may shift back toward the 1.3567 and 1.3613 resistance levels.

The euro continues to slip lower against the U.S dollar, with price-action continuing to test the key 1.1958 technical support level. After trading below the 1.1989 level on Monday, sellers took firm control of the EURUSD pair, with dip buyers now losing momentum on tepid upside rallies. The euro risks further losses below the 1.1958 support level, with sellers likely to target the 1.1910 region. Traders now look to the next directional move in the U.S dollar index, as dollar buyers look for further upside towards the 92.60 level.

The EURUSD pair is strongly bearish while trading below the 1.1989 level, further downside towards 1.1958 and 1.1910 seems increasingly likely.

Should the EURUSD pair start to recover above the 1.1989 level, buyers may start to target the 1.2030 and 1.2050 upside levels.

The first releases of the European session take place at 07:00 GMT with reports on German industrial production and trade. Industrial output in Europe’s largest economy is expected to grow 1.8% in November, which translates into a year-over-year gain of 4%. That follows a 1.4% decline in October.

Berlin’s trade surplus is expected to widen to €21 billion in November from €19.9 billion. Exports are expected to grow 1.2% following a 0.4% decline the previous month. Imports, meanwhile, are projected to climb 0.6% month-on-month.

Shifting gears to France, MINEFA will report on the national trade balance for November. The deficit carried by Paris is expected to widen to €4.8 billion from €4.96 billion in October.

The European Commission’s statistical agency will report on unemployment at 10:00 GMT. The euro area jobless rate is expected to drop to 8.7% from 8.8%.

Investors will also be keeping an eye on the European Central Bank’s non-monetary policy meetings, which are scheduled to kick off at 08:00 GMT.

There are no major data releases scheduled in the North American session. The American Petroleum Institute (API) will supply the market with the weekly crude inventory report, which is a precursor to the official data on Wednesday.

On the policy front, Federal Reserve Bank of Minneapolis President and Federal Open Market Committee (FOMC) member Neel Kashkari will deliver a speech at 15:00 GMT. The FOMC will hold its final policy meeting under Janet Yellen at the end of the month.

Earlier in the session, Australia reported an unexpected surge in building permits for the month of November. Approvals spiked 11.7%, confounding expectations of a 1.3% decline, the Australian Bureau of Statistics said in a report. Compared to a year ago, building permits rose 17.1% following an 18.4% increase the month before.

AUD/USD

The Australian dollar rose on Tuesday, gaining the upper hand on a US currency that has struggled for momentum in recent weeks. The AUD/USD exchange rate climbed 0.3% to 0.7858, where it was trading near three-and-a-half month highs. The pair faces immediate support at 0.7800. On the opposite side of the ledger, the recent high of 0.7870 is the first resistance eyed by the bulls.

EUR/USD

Europe’s common currency underwent a short-term bearish correction on Tuesday, as prices fell back from four-month highs near 1.2100. The EUR/USD exchange rate was last seen trading at 1.1971, where it was little changed compared to the previous close. The pair sees immediate support at 1.1955, followed by 1.1920. Resistance is located just above the psychological 1.2000 zone.

GBP/USD

Cable was little changed in Asian trading after a choppy Monday session saw prices bottom out at 1.3529. The GBP/USD exchange rate was last seen hovering around 1.3580. The pair faces immediate support at the 1.3520 region.

GBPUSD is neutral in the short term and is consolidating gains made after breaking above the key 1.3500 level last week. The pair maintains an overall bullish undertone. The short-term technicals are neutral to bullish.

The market is well-capped below the 1.3600 level which is now a strong resistance level. There is scope for a move higher out of the current consolidation range but prices need to see a sustained move above last week's high of 1.3612 (January 3). Only a clear break above this level would increase the odds for a move beyond last year's 1.3656 top.

Downside risks increase below immediate support at 1.3500. A dip lower from here would expect to find support at 1.3300 and then from here, 1.3000 comes into focus. Anything lower would fundamentally change the market structure.

For now, GBPUSD holds a neutral stance in the short term but a continuation of the bullish phase cannot be ruled out yet. In the bigger picture, the bullishly aligned 50-day and 200-day moving averages support the positive outlook.

Sunrise Market Commentary

• Rates: Calendar back loaded, range bound action today?
  Atlanta Fed Bostic called for 2 or 3 rate hikes this year. He is a dovish leaning centrist and doesn't change our/the market's call of a March rate hike. Today's eco calendar is thin and probably won't impact trading. We expect range bound action, but heavy bond supply could be negative. Later this week, attentions turns to German wage negotiations and US inflation data.
• Currencies: EUR/USD drifting south. Yen rebounds as markets ponder BOJ action
  EUR/USD declined yesterday after Friday's rejected test of 1.2092 resistance. The yen rebounds overnight as investors try to assess the meaning of the BOJ reducing purchases of longer-dated JGB's. Is this a first step to gradual policy normalization. Eco data probably won't guide USD trading today. Swings in USD/JPY might set the tone for global USD trading

The Sunrise Headlines

• US stock markets gained slightly ground with Dow Jones underperforming (flat). Most Asian stock markets are positively oriented overnight with Korea underperforming as Samsung's profit guidance missed expectations.
• The Federal Reserve may only need to raise interest rates two times in 2018 given weak price pressures and possible loss of public confidence in the central bank's ability to hit a 2 percent inflation target, Atlanta Fed Bostic said.
• The yen climbed after the BoJ reduced its purchases of super-long bonds, adding to speculation that the central bank may be looking to wind back its ultra-loose monetary policy.
• Special counsel Mueller has informed lawyers for President Trump that he may seek an interview with the president early this year, prompting concerns within the Trump legal team over terms of the questioning, according to sources.
• May's Cabinet shuffle failed to consolidate her power. Health Secretary Hunt successfully resisted being given another post and Education Secretary Greening quit after the PM offered her the work and pensions portfolio. Johnson kept his foreign minister job, while Hammond and Davis also stayed on.
• Inflation-squeezed British shoppers cut back on almost everything other than food in the last three months of 2017, leading to the biggest fall in non-grocery spending since 2009, industry figures (BRC) showed.
• Today's eco calendar is rather thin with only EMU unemployment rate and US NFIB small business optimism. Supply heats up with Austria, the Netherlands, Germany and the US tapping the market

Currencies: EUR/USD Drifting South. Yen Rebounds As Markets Ponder BOJ Action

USD/JPY declines as BOJ amends JGB buying

The dollar gained against the euro yesterday, but struggled against the yen. EC economic confidence hit the highest level since end 2000, but didn't help the euro. Bunds even outperformed US Treasuries, slightly widening the USD-EUR interest rate differential. Friday's rejected test of EUR/USD 1.2092 caused a further repositioning out of EUR/USD longs. The pair dropped below 1.20 and finished at 1.1967. USD/JPY failed to keep up with the USD rebound. EUR/JPY profit taking after last week's rally and a slowing of the equity rally weighed on USD/JPY later in the session. The pair closed the day little changed at 113.09.

The yen jumped higher overnight as the BoJ reduced longer-dated JGB purchases. Investors ponder whether this could be a first small step to policy normalisation. USD/JPY dropped half a yen (currently 112.65). EUR/USD is little changed (1.1970). The Aussie dollar (AUD/USD 0.7860) profits slightly from strong building approvals. The eco calendar is thin today. EMU Unemployment is expected to decline from 8.8% to 8.7%. US NFIB small business confidence might near the historic top. Both series are no market movers. Technical factors will probably prevail. We keep a close eye on USD/JPY's decline. For now, it had few spill-over effects on other USD cross rates. The jury is still out, but a subsequent, further decline of EUR/JPY might also (temporary) weigh on EUR/USD, or at least prevent a rebound. In a broader perspective, slightly disappointing payrolls didn't cause USD damage. EUR/USD 1.2092 resistance survived. This week's US price data are a next reference for USD trading. Recently, the greenback suffered as the global recovery might force other major CB's (including ECB) to join policy normalisation. We keep the hypothesis that enough good news on the euro/'bad news' on the USD is discounted and that a sustained break beyond 1.2092 is not evident.

Sterling profited from the government reshuffle yesterday as it could be an indication that the UK PM is regaining some grip on UK politics. The decline of EUR/USD also weighed on EUR/GBP. The pair closed the session at 0.8821. Overnight, BRC like-for-like sales rose 0.6% Y/Y, but this was due to higher food prices. The underlying picture was less brilliant. It is also far from sure that the government reshuffle will make things easier for PM May. A further technical decline of EUR/USD might weigh on EUR/GBP ST. However, we don't see a strong case for a sustained sterling rebound. EUR/GBP 0.8700/60 support looks solid. We keep a EUR/GBP buy-on-dips in case of return action to 0.87.

USD/JPY: yen rebounds as ‘BOJ action' sparks speculation on policy normalization. Break below 112 would hurt ST picture

Download entire Sunrise Market Commentary

Market movers today

Germany is due to release industrial production at 8:00 CET for November, which is expected to show a decent rebound of 1.8% m/m after the 1.4% m/m drop in October.

Euro unemployment for November is estimated to have declined to 8.7% from 8.8% in October. It would be the lowest level since 2009 and below the long-term average. However, i t is sti ll above the EUC ommission's e stimate for lon g-term unemployment at 8.4% for 2018.

The US is due to release NFIB small business optimism index around noon. It continues to beat very strong levels –boosted partly by the expectation of a US corporate tax cut.

Chinese inflation numbers will be released overnight. We expect an increase in the CPI inflation from 1.7% to 1.9% – still far below the 3% target. PPI inflation should drop back to 4.8% y/y from 5.8% y/y due to base effects from a very strong m/m November increase in 2016.

Selected market news

Overnight , USD/JPY dropped on news that the BoJ has cut back its bond purchases in the long end of the curve. The cut back is a consequence of the central bank's yield curve control target, but triggered concerns in the market that an exit from quantitative easing is drawing closer. Yesterday saw a couple of interesting dovish comments from members of the Fed. The At lanta Fed's Bostic (vot er in 2018) stated that his base case is two to three hikes in 2018 contrary to the median dot of three hikes, that low inflation expectations is a risk and that the Fed should be extremely cautious if the yield curve gets close to inverting. In addition, San Francisco's Williams was advocating for price level targeting and arguing that it is in fact a very modest change compared to the current inflation target .

There was also a string of interesting news from the White House. According to Reuters, US President Trump is said to be close to nominating a person for the position of Fed Vice Chair and apparently Richard Clarida is out of the race for that position. According to a Bloomberg story, US Treasury Secretary Steven Mnuchin has apparently asked congress to lift the debt ceiling before 28 February, which in turn would put a lid on any concerns in the market about a near-term US debt default . Finally, the White House is apparently considering a targeted strike in North Korea as a reaction to a missile test in order to illust rate that the high price the nation could pay for nuclear progress would be feasible according to WSJ. The market did not react to the news, but it serves as a reminder of the geopolitical risks looming in the background.

In the oil market , we have seen supply-related news out of Libya and Iraq. The former was said to ready a rise in output after a pipe blast two weeks ago, while the latter is confronting the Kurds about the crude production taking place in the northern part of Iraq. The oil market saw little reaction to the news.

Key Highlights

• The Euro after a solid upside move formed a high at 136.63 against the Japanese Yen.
• The EUR/JPY pair moved down sharply and broke a crucial bullish trend line with support at 135.25 on the 4-hours chart.
• The pair must stay above 134.40 to avoid any further declines in the near term.
• Today’s German Trade Balance report for Nov 2017 could have a positive impact on EUR/JPY.

EURJPY Technical Analysis

The Euro opened 2018 with a positive bias not only against the US Dollar, but also versus the Japanese Yen. The EUR/JPY pair traded above 136.00 and is currently correcting lower.

Looking at the 4-hours chart, it seems like there was a major rejection from the 136.63 high. The pair has moved below the 50% Fib retracement level of the last wave from the 133.90 low to 136.63 high.

The downside was strong since there was a break below a crucial bullish trend line with support at 135.25 on the same chart. It ignited further declines below the 61.8% Fib retracement level of the last wave from the 133.90 low to 136.63 high.

Below the trend line support, the 134.30-134.40 area is the next major support. EUR/JPY must stay above 134.40 with no 4-hour close to avoid any trend change. Should there be a close below 134.40, the pair could move back towards 133.25.

On the upside, an initial hurdle for a recovery is at 135.25. Above 135.25, the pair will most likely drift towards the 136.00 handle.

Fundamentally, the Euro Zone recently saw the release of the Economic Confidence indicator for Dec 2017 by the European Commission. The result was better than the forecast of 114.8, as there was a rise in the Economic Confidence indicator from 114.6 to 116.00.

However, the result failed to lift the market sentiment for the Euro. It traded lower versus the US Dollar as well. Both EUR/USD and EUR/JPY declined strongly and are heading towards key support levels. Thus, the next few sessions could be crucial. An increase in the current selling pressure may push both pairs further into the bearish zone.

For the 24 hours to 23:00 GMT, the AUD declined 0.1% against the USD and closed at 0.7841.

LME Copper prices declined 0.2% or $12.5/MT to $7084.5/MT. Aluminium prices declined 1.3% or $28.0/MT to $2177.5/MT.

In the Asian session, at GMT0400, the pair is trading at 0.7862, with the AUD trading 0.27% higher against the USD from yesterday's close, following better-than-expected housing sector data in Australia.

Data released overnight showed that Australia's seasonally adjusted building approvals unexpectedly rebounded 11.7% on a monthly basis in November, confounding market expectations for a drop of 1.3%, driven by a spike in apartment and townhouse building. In the previous month, building approvals had registered a revised fall of 0.1%.

The pair is expected to find support at 0.7838, and a fall through could take it to the next support level of 0.7813. The pair is expected to find its first resistance at 0.7876, and a rise through could take it to the next resistance level of 0.7889.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.