As usual, Thursday’s European Central Bank (ECB) policy decision and press conference will be watched closely for clues regarding the bank’s current stance on monetary policy, including its views on Eurozone inflation, interest rates, and potential tapering of the ECB’s massive quantitative easing (QE) program. Of primary concern for euro traders will be whether or not a timeline for QE tapering will be addressed, as well as whether ECB President Mario Draghi will verbally attempt to stem the strength of the euro. Last month, minutes from July’s ECB meeting unveiled concerns about the possibility of the euro “overshooting.”
If Draghi directly addresses euro strength and/or fails to provide any clear direction on QE tapering on Thursday, the euro could take a hit after nearly five months of solid appreciation against its major currency counterparts. Conversely, if the ECB provides any concrete plans for tapering and/or fails to mention recent euro strength, the euro could be set to extend its prolonged rise.
A key currency pair that should be impacted significantly by the tone of Thursday’s ECB decision will likely be EUR/JPY, especially given the recent resurgence of the Japanese yen on safe-haven demand amid heightened market risk factors. From a technical perspective, EUR/JPY has just come down off a new 19-month high at 131.69 established just last week, which was only slightly higher than the previous high of 131.39 that was hit in early August.
With any ECB-driven fall in the euro on Thursday, EUR/JPY is likely to extend its pullback from recent highs, with a near-term target around the key 128.00 support level. In contrast, if the ECB takes on a more hawkish tone, a EUR/JPY breakout above its recent highs and the 132.00 resistance area, which would extend the bullish trend, would be a likely scenario. In that event, the currency pair could then begin targeting a further resistance objective at 134.00.