EUR JPY outlook bullish as inflation in Eurozone outpaces Japan

The Fed’s dovish rate hike on Wednesday caused the dollar to weaken noticeably and there was some follow-though in the selling pressure on Thursday as the Dollar Index neared the 100 level again. The other major central banks’ policy decisions were mostly in line with the expectations, although there was a bit of a surprise at the Bank of England with one MPC member voting for a rate rise. The Swiss National Bank reiterated the need to keep its monetary policy extremely accommodative, as too did the Bank of Japan overnight.

ECB more likely to tighten its policy first as BoJ’s fight with deflation continues

The BoJ’s Governor Kuroda sounded cautious about the prospect of hitting the inflation target which suggests that the central bank is far from being in a position to start tightening its monetary policy. With the BoJ unlikely to lift its policy rates anytime soon, the USD/JPY may be able to bounce back in the coming days. In fact, the European Central Bank appears more likely at this stage to tighten its belt than the BoJ, because inflation is rising more noticeably in the Eurozone. With this fundamental backdrop, the EUR/JPY exchange rate may appreciate further in the coming months as the expected path of monetary policy between the two regions widen.

EUR/JPY technically bullish

Indeed, having broken out of a falling wedge pattern at the start of the month and currently residing above both the 50- and 200-day moving averages, the EUR/JPY looks technically bullish. In the short term outlook, the cross needs to hold its own above the broken 121.00/10 area for the bullish momentum to remain intact. If so, we could potentially see the start of a move towards the top of the recent price range around 124 area and towards 125. However, if the EUR/JPY were to break below this 121.00/10 level then we may see a deeper pullback, perhaps towards 120.00 or even the bullish trend line or the 200-day average, which is currently around 117.60 area. The long-term technical bias would only become invalidated however if and when the rising trend line breaks.