- EUR/JPY testing key resistance at a 61.8% Fibonacci retracement level.
- All eyes on the European Central Bank’s announcements tonight.
EUR/JPY is trading around 118.70 in early Asia and quiet as a mouse awaiting the European Central Bank’s announcements tonight in a highly anticipated meeting. The cross has been trading in a tight range as investors brace for the ECB as departing president Mario Draghi fronts his second to last meeting.
“The market is expecting a strong stimulatory package. Interest rates are expected to drop 10 to 20bp with market expectations weighted towards 10bp. QE worth 30 to 50 billion euros per month for the next 9-12 months is expected, along with a tiered deposit rate and dovish forward guidance,”
analysts at ANZ bank explained.
On this basis, the euro has resumed a bearish bias and trajectory leading into the meeting and EUR/USD crossed the 1.10 threshold once again, scoring a low of 1.0985 overnight. However, several hawkish ECB members have publicly argued against restarting the QE program that was shuttered end-2018 after EUR2650bn in bond purchases which capped the downside in a strong correction paining a bullish pin bar on the candlesticks. Should there be any divergences from the expected one way or the other, the euro could move considerably, but based on the expectations, implied volatility is only around 50 pips to either side in EUR/USD.
Analysts at Westpac have noted that Draghi and other key officials among the 25 Governing Council members “seem likely to form a consensus to resume sovereign bond purchases, albeit perhaps not actually starting until December. Our base case is EUR40bn per month.”
EUR/JPY testing critical resistance
EUR/JPY has been correcting the broader bearish trend and the bulls have shown their intentions to break beyond the August 1 lows/prior support with a spike to the 119 handle, which, however, was rejected, subsequently leaving a bearish spinning top/dojo which casts a technical bearish argument on the daily chart. However, with the ECB expectations priced in, the euro could find significant relief should the ECB disappoint and under deliver – The opposite can be presumed should the ECB meet or exceed expectations.
Like EUR/CHF, EUR/JPY has been tracking the performance of global equities and both pairs have been under immense pressure on the back of global growth concerns and trade wars, with the Yen and CHF attracting safe-haven investment flows. However, the Swiss National Bank has been active in the market trying to support the cross which likely leaves EUR/JPY a more attractive buy and hold in the case that the euro rallies.
On an inline ECB, without overexerting beyond expectations, the implied volatility brings in a target of beyond the 61.8% retracement of the late July highs to Sep swing lows at 119.30 onwards towards a 78.6% retracement at 120.20. To the downside, a test below 118 the figure would come into play.