- EUR/JPY is enroute for a break of key support at 124.45/50 as the consolidation of recent correction wears thin.
- EUR/JPY is currently trading at 124.50, from a high of 124.88 and up from a low of 124.45.
EUR/JPY is tracking price action in global stocks and risk appetite with the greenback taking the lead, pressuring the euro as investors move away from risk associated with German’s poor run of economic performance of late and warnings from the ECB.
We have the ECB this week, which will likely do nothing although as Europe edges closer to a recession and the risks of a hard Brexit on the horizon should be detailed and worth a listen. “Inflation lies sharply below the ECB’s implied December forecast and growth in the final quarter of 2018 likely came in at half the ECB’s projected pace. However, we expect the ECB to look through lower energy prices and treat recent activity disruptions as temporary, and therefore leave both the balance of risks and its forward guidance unchanged from December,” analysts at TD Securities explained.
US government shutdown and Sino/US trade risks
Elsewhere, the US government shutdown is going to become more of a concern as it moves into the 29th day on Tuesday after Martin Luther King Jr. Day and s expected to hinder US growth by 0.1% every two weeks that the shutdown continues. This should start to impact US stocks and potentially support the yen. Another supporting factor could be the prolonged dispute between Beijing and the US over trade. With no concrete progress being reported, and so long as headlines remain conflicting, the yen can also collect a safe haven bid when stocks correct lower until a breakthrough is sighted. However, for the meantime, investors are clutching at straws and remain optimistic about promising headlines, despite their lack of credibility. For instance, markets rallied on reports that U.S. Treasury Secretary Steven Mnuchin discussed lifting some or all tariffs imposed on Chinese imports and suggested offering a tariff rollback during trade discussions scheduled for Jan. 30.
However, the news was met with conflicting headlines where Trade Representative Robert Lighthizer had resisted the idea, one which had reportedly not yet been introduced to President Donald Trump. U.S. stocks advanced on the news even as a Treasury spokesman working with the administration’s trade team denied the report: “Neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs or other parts of the negotiation with China,” the spokesman said. “This an ongoing process with the Chinese that is nowhere near completion.”
EUR/JPY levels
A correction of stocks and sentiment could spell havoc for bulls protecting the 200 hr SMA which guards a breakdown to S3 at 123.72 and before the 23.6% fino retracement located at 123.09.. Analysts at Commerzbank explained that EUR/JPY faces tough resistance offered by a double Fibo at 125.50 and we would allow for some further near term weakness:
“The market recently saw a major spike lower that eroded the 2012-2019 support line at 119.31 – the low was 117.845. The move looks exhaustive but should struggle at tougher resistance at 124.91/25.50, the August low and double Fibo. We favour near term failure and some near term consolidation. We suspect that price action here will prove pivotal and while capped here a negative bias will remain.”
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