EUR/JPY’s key support under threat on dovish ECB
Fawad Razaqzada January 21, 2016 10:50 AM
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.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.