EUR/JPY: taking on extra highs on softer Yen ahead of ECB

• The focus over the week will be on the ECB, as well as US CPI and Retail Sales.
• How much of the European Central Bank (ECB)  is already priced in?

EUR/JPY is currently bid, trading some 0.16% higher travelling between a low of 1118.43 and 118.67. The focus over the week will be on the ECB, as well as US CPI and Retail Sales – The question is, how much of the European Central Bank (ECB)  is already priced in and how far will the Yen fall on the back of rising global yields and a return of risk appetite?  

Yields have begun to move off recent lows as risks on the trade front have receded, and this, in turn, is leaning heavily on the Yen which has otherwise enjoyed a run of safe-haven flows over the summer period.  Looking ahead, the next major risk in the ECB, but at the same time, the Dollar could be a spanner in the works for the bears.

ECB expected to be dovish

With respect to the ECB, analysts at TD Securities explained that they are on the dovish side of expectations, looking for a 20bps rate cut and €40bn/month of QE:

 “We’re fairly comfortable with our downside view on rates, though less certain on QE given the scale of push-back from some of the ECB hawks recently.A more-dovish-than-expected ECB puts downside risks back into view for EURUSD, with renewed QE as the main headwind. Prospects for a sustained move lower depend more on future signals, however, as much of the Fed/ECB policy divergence may already be priced.”

US data in focus

With regards to the US data, we have the Federal Reserve’s interest rate decision later this month as well and considering the less negative backdrop when it comes to trade talks, the FOMC might come to the conclusion that a 50 basis point cut would be far too aggressive and depending on data, they may even hold off entirely which would weigh heavily on the euro and likely on the cross as well.  On the flip side, should data fall in the same camp as last week’s disappointment in the Nonfarm Payrolls data, then a 25 basis point cut could still dishevel the Dollar, which is currently the cleanest dirty shirt in the laundry basket – Thus supporting the euro and, most likely, the cross as well.

EUR/JPY levels