European FX Close - YEN firms on climbing BOJ rate hike odds

The YEN edged higher throughout the session following Bbg reports that some BOJ officials are open to raising rates at the July meeting given that inflation remains broadly in line with forecasts; assessing the Bank's policy rate range of 0 to 0.1% to be very low and see a risk of missing an opportunity to hike rates given a lot of uncertainties going forward. However, officials also see weakness in consumer spending complicating their decision over hiking and some view skipping a rate hike in July allows more time to examine incoming data to confirm if consumer spending will pick up as expected. Some of them believe the BOJ should avoid giving the impression of being overly hawkish.

Nikkei also reported that a top Japanese ruling party lawmaker called on the BOJ to be more clear in articulating its policy, including its consideration of raising rates gradually. Implied probability of a BOJ hike this week currently stands at 44%.

In turn, USD/YEN pulled-back to weekly lows of 155.83, while EUR/YEN fell to 169.27 - the lowest since June 19. Note, analysts at Citigroup Inc warned that Japanese authorities might step into the market and sell the European common currency if euro-yen nears the 180 level.

EUR sales were also prominent vs the USD, with the pair falling off near-1.0900 highs to 1.0844 as players continued to mull Lagarde's focus on fundamentals, having admitted last week that risks to economic growth are tilted to the downside and that investment remains weak.

Since the decision, players continue to bet on two rate cuts this year, while hedge funds have also turned bearish the euro through options on a tactical basis - most structures look for a retreat toward $1.08 strike with longer-term plays using $1.05 strike cheapeners.

Following the ECB's on-hold decision, policymaker DE GUINDOS explained that central bank will be in a better position to decide on interest rates at its next Governing Council meeting in the autumn. Guindos also noted that the current level of uncertainty is "huge, so we have to be prudent when taking decisions." He added that inflation will be around current levels until the end of the year though admitted that all measures of underlying inflation are coming down, therefore the disinflation process will continue from the start of next year. Guindos also said the ECB is already seeing that wages are starting to slow down.

EUR/USD losses paused after data revealed EMU consumer confidence rose to -13 in July from -14 in June and above the -13.5 median forecast.

In the US, Richmond Fed business confidence deteriorated to -17 in July vs -10 last month and missed the -7 estimate, while US existing home sales fell - 5.4% in June vs the -3.2% forecast.

AUD/USD continued its pullback from the 0.6799 highs hit on July 11th, falling to new lows of 0.6612 as iron ore and oil prices declined as investors indicate concerns over demand in China. To this, the outcome of the Third Plenum underwhelmed investors, with few steps taken to boost metals demand or fix the property crisis, while on the supply side, data from Brazil showed daily average shipments reached 1.62 million tons in the first 15 business days of July, a faster pace than in the same month a year ago.

Meanwhile, WESTPAC warned that AUD/JPY faces ongoing downside risks in 3Q, toward the 100-102 region, amid skittish global markets, shifting intervention tactics, a likely BOJ hike on July 31 and an on-hold RBA in August.

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