While all eyes are on the EUR, USD/JPY could be

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The USD remained firm overnight after Friday’s release of the US NFP gave a boost to both the US currency as well as the DOW. Currencies remained in tight ranges during the Asian trading session and early morning European session a traders seemed to take a break.

While all eyes are on the EUR, the USD/JPY could be the main mover this week after crashing through the 95.00 level last week.

BOJ governor nominee has made it clear that the Bank of Japan will continue with an aggressive easing policy after he is confirmed. He did mention that the current amount of easing is “not strong enough” to achieve the 2% inflation target. USD/JPY has cracked the 96.00 level and tested resistance at 96.25. The range here has been small overnight with the low 95.95. Support here is at 95.80.

Analysts are beginning to talk about the 100.00 level regarding the USD/JPY and many expect that level to be reached sooner rather than later. While I agree that this target will eventually be met, I don’t see this happening until at least the end of the 2nd quarter.

The EUR has been above and below the 1.3000 level during most of the overnight trading session, testing support at 1.2980 and resistance at 1.3025. The pressure on single currency remains as problems continue within the Eurozone. EU ministers will meet this week in Brussels to discuss bailout terms for Cyprus. According to German Finance minister Schaeuble, the Cyprus problem is a “complicated situation”. Italy is back in the news this week as the Italian president Napolitano has yet to call for a new election. He said he may consider a national unity government and accept a minority cabinet.

The ratings agency Fitch (that downgraded Italy) said last week that the “increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession”. In other words, the economic recession in Italy is one of the worst in Europe.

Speaking of Italy, despite the problems that exist in the country and the inability to elect a government, Italians are still in favor of staying in the Eurozone and are against holding a referendum on membership. An opinion poll printed on Sunday showed 74% of those participating want to keep the EUR. Only 16% favored a return to the lira. Apparently there had been some debate within the country after the vote showed Italians were against the austerity measures that had been imposed by Italy’s Eurozone partners. So, to no one’s surprise Italy will remain in the EUR.

The latest CFTC position data shows the USD remains firm as short positions for the week ending March 5 rose in EUR, JPY, GBP, AUD and CAD. EUR shorts rose to 26,100 from 9,000. The EUR positions had been long 38,000 back in early February. JPY shorts rose to 73,400 from 65,300. GBP to 43,800 from 36,100, AUD net longs dropped to 7,100, while CAD shorts moved up to 46,700 from 21,400 the previous week. GBP and CAD shorts have had 7 straight weeks of deterioration.

The markets had a big move last week, so there is the possibility of some retracement early in the week.

The main support for EUR is at 1.2980, followed by 1.2950. A close above the 1.3170 level is needed to reverse the downward trend.

Further reading: EURUSD forecast.

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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