EUR/JPY’s key support under threat on dovish ECB
Fawad Razaqzada January 21, 2016 8:59 PM
<p>The euro fell sharply during the European Central Bank press conference this afternoon. My colleague Matt Weller has written a full review of the ECB […]</p>
The euro fell sharply during the European Central Bank press conference this afternoon. My colleague Matt Weller has written a full review of the ECB press conference, which you could find HERE. In short, President Mario Draghi said the ECB was ready to act as he delivered a bearish assessment on the Eurozone economy, saying the downside risks have increased since the start of the year and that inflation outlook is significantly lower due to the impact of renewed oil price drop. As a result, the ECB will review and may reconsider its monetary policy stance in March.
The market’s reaction to the dovish ECB communication was clear. Traders dumped the euro, while stocks rebounded on hopes of more QE, perhaps as early as March. But given that the euro is a funding currency, the on-going volatility in the stock markets may prevent it from falling significantly further against the dollar and other stronger currencies – this is due to traders unwinding their carry trades. Consequently, we may see a more profound reaction against another lower-yielding currency such as the Japanese yen, which is also considered a safe haven. Conversely, if risk assets rally, then the EUR/USD may be a better currency pair for those who are bearish on the euro.
Thus, if equities resume their declines soon then the EUR/JPY could get absolutely hammered as traders rush to the perceived safe haven that is the Japanese yen. But at the time of this writing, the EUR/JPY was trading inside a key support area between 126.00 and 127.00. Here, it was also testing the lower trend of its bearish channel and the 161.8% Fibonacci extension level of the last upswing. Therefore the possibility for a technical bounce is there, for now. But even if it rallies, the sellers will remain in control for as long as price remains within the bearish channel. Some of the other shorter term resistance levels to watch include the recent consolidative range high around 128.50, followed by previous support at 129.65.
But in the (more likely) event that the EUR/JPY fails to rally, a breakdown below the above-mentioned support area (126.00-127.00) could pave the way for a significant drop as there is little further short-term support levels immediately below here, barring perhaps the psychologically-important 125.00 handle. Below 125.00, the next stop could be around 122.00, where a couple of Fibonacci extension levels converge with the 50% retracement level of the entire 2012-2014 rally.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.