The euro is looking to be in a good spot at the moment as economic fears are not as bad as expected and inflation looks to be trending softer, which is very much welcome news for the ECB. While this may not warrant more rate hikes, it at least provides the central bank with some breathing room in order to stick with the higher rates for longer narrative.
And that is essentially it right now. In the battle among major central banks, it is all about who is able to vindicate themselves in pushing the higher rates for longer narrative to markets. In other words, it is about whose economy is better. And in the last few months, it has been a straightforward answer that it is the US. But is Europe now able to navigate a soft landing themselves?
A lot of the negativity has already been priced in for the euro and so, we might have reached the point of peak pessimism and are now turning a corner. That especially since Q3 GDP figures are not as bad as what we have seen with regards to the PMI data. I still hold my doubts on the euro area outlook but when market players are starting to look the other way, it's best to take notice of that.
As for the Japanese yen, it continues to be what it is as the BOJ kicks the can down the road once more today. Rate differentials are a key driver in FX and that continues to be the case between the yen and most other major currencies this year.
If USD/JPY can sustain a breakout above the 150.00 mark and the euro starts to gather some momentum on its own, we might just see EUR/JPY be headed back towards 2007-08 highs near 168.00 next.
