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EUR/JPY maintains strength ahead of BoJ, ECB

With the first round of last Sunday’s French presidential election fading into the background and pro-euro candidate Emmanuel Macron still heavily favored to win the presidency in early May, the euro has managed to retain most of its recent gains, especially against the Japanese yen. EUR/JPY rose to hit a key historical support/resistance level around 122.00 on Wednesday after having gapped up in the aftermath of Sunday’s French vote outcome, as the euro surged in a relief rally while the yen dropped on lower safe-haven demand.

There is no shortage of political and economic events to move markets at the current time, including US President Trump’s plans to reform and cut US taxes, but the more pressing events for EUR/JPY will occur during Thursday’s Asian and European trading sessions. Both the Bank of Japan (BoJ) and European Central Bank (ECB) will issue their respective monetary policy decisions and statements on Thursday.

While both of these key central banks are not expected to make any major changes to monetary policy at this time, they will more than likely give hints as to future potential policy direction given recent and current economic and political developments. The BoJ is expected to keep its main interest rate target unchanged in negative territory (at -0.10%) as usual, and maintain its massive "quantitative and qualitative monetary easing" (QQE) program. Barring any surprises, the key to Thursday’s statement will be the BoJ’s updated projections on Japan’s economic growth and inflation, which could have a significant impact on the recently-plunging Japanese yen.

Meanwhile, the ECB is also expected to keep its minimum bid rate unchanged (at 0.00%). There had been some earlier speculation that the ECB may be looking to raise interest rates before unwinding its huge asset-purchase program, but that notion was later dispelled by the central bank for the time being. The current sentiment is that despite Emmanuel Macron being seen as the clear front-runner over Marine Le Pen for the French presidency in early May, the ECB will unlikely take any chances with this major political risk by sounding overly hawkish in Thursday’s statement. However, the general trend recently of rising inflation in the euro area may prompt more talk of a pullback in monetary stimulus, which could give a further boost to the euro.

Amid these key central bank decisions, EUR/JPY has reached up to a critical technical juncture. The currency pair has not only reached key resistance around the 122.00 level, as noted, but it has also tentatively broken out above a key long-term downtrend line extending back to the mid-2015 highs. A false breakout above this trend line occurred in mid-March before a sharp month-long plunge ensued. With any impending breakout above 122.00 surrounding Thursday’s central bank meetings, the major upside target remains around the 124.00 resistance level, around the December-January highs. Any sharp down-move from 122.00 resistance, however, could pressure EUR/JPY back down towards this week’s election-driven gap.

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