EUR/JPY: Italian concerns continue to weigh on sentiment
Fawad Razaqzada October 19, 2018 6:43 AM
European stock markets continued to struggle first thing this morning – despite a sharp rebound for Chinese markets overnight – as the yield differential between 10-year Bund and BTP widened further amid ongoing concerns over Italy's budget proposals.
European stock markets continued to struggle first thing this morning – despite a sharp rebound for Chinese markets overnight – as the yield differential between 10-year Bund and BTP widened further amid ongoing concerns over Italy's budget proposals. The selling of Italian bonds rippled through to other Eurozone markets with yields on 10-year Spanish debt, for example, hitting its highest level since March 2017. However at the time of writing, the stock markets were coming off their worst levels amid short-side profit-taking ahead of the weekend, and as investors awaited direction from Wall Street which sold off yesterday. In FX markets, meanwhile, the EUR/USD almost touched last week’s low at 1.1430 before bouncing back slightly. The single currency fell most significantly against the New Zealand dollar. Most other euro crosses were weaker at the time of writing.
Figure 1: Italian-German 10-year bond yield differential
Source: TradingView and FOREX.com. Please note, this product is not available to US clients
EUR/JPY could suffer if concerns escalate
The EUR/JPY was an exception, which was showing apparent strength despite the stock market weakness. But appearances can be deceptive. Indeed, this particular euro pair actually made its move first when it fell sharp sharply yesterday. So if the stock market weakness persists and safe haven flows for the yen continues then the EUR/JPY could be among the first euro crosses to extend its decline further, despite today’s bounce.
EUR/JPY’s path of resistance to downside despite its bounce today
Technically, the EUR/JPY’s failure to hold above the old high at 131.95 around the start of the month was the first major warning sign that rates might sell-off following that fakeout. Indeed, the EUR/JPY has drifted lower since then, making a series of lower lows and lower highs amid the ongoing bearish fundamental backdrop (stocks selling off because of trade concerns and China, and amid Italian concerns). Most recently, the EUR/JPY went into a consolidation mode below a critical resistance level around 130.15 and support at 129.20. But yesterday, the buyers lost control and rates broke out of this range to the downside. Thus the path of least resistance remains to the downside for now.
Going forward, the 129.20 level is going to be very important. For as long as the bears hold their ground here, they will remain in control. But if this level were to give way then things might start turning bullish again for the EUR/JPY, especially if it also goes on to make a higher high above that 130.15 level. But if the downward pressure remains, then the next immediate objective for the bears would be the liquidity resting below 127.90, followed by old resistance levels at 127.00 and then at 126.50.
Figure 2: EUR/JPY
Source: eSignal and FOREX.com.
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.