Euro down on German court ruling, EURJPY falls through support
The euro made a sharp move lower overnight after German judges declared war on the European Central Bank’s (ECB) bond-buying program. The setup in EURJPY is suggesting a move lower on euro weakness and gentle JPY appreciation.
4-hr chart: EURJPY has fallen through support at 115.55. Chart source data: Metaquotes MT5
EURJPY has fallen through support at 115.550 overnight and has made further moves lower in the early asian session. It’s been three years since the pair traded at these low levels, with no previous support level until 2016-2017 support at 114.90.
The euro took a hit overnight as German judges ruled it was unconstitutional for German authorities to not challenge the ECB’s quantitative easing (QE) program in its current form, although the €750bn Pandemic Emergency Purchasing Program (PEPP) will not be affected as it’s subject to looser limits. What has become apparent though is that the ECB’s ‘whatever it takes’ approach might now come with limits.
The ECB is supposed to be above individual state courts so the ruling is another hit to the European Union, which is increasingly divided over support programs for economies ravaged by the virus.
French President Emmanuel Macron recently warned the EU ‘faces collapse’ as ideological differences between fiscally conservative nations and the more profligate south delay progress on a support package. The division puts a bearish bias on the euro’s outlook.
Chart of the Day: EURJPY
EURJPY bounced back from its support levels last week, regaining some of its losses from the December highs. The pair looks set to retest the major resistance zone between 120.079 to 122.491.
Most of the gains came after US President Trump calmed markets, advising there would be no military response to Iran despite bombings at US-Iraqi military bases. This news came as a surprise and the bullish bias faded the need for safe havens such as gold (XAU) and JPY.
That said, a close above the December 13 high at 122.26 could encourage more buyers to join the market. Also consider the daily resistance levels at the bottom of the chart.
The 14-day Relative Strength Index (RSI) is now gaining momentum, with price staging its rally from the retracement to the 38.2% Fib. level of the major upward range between the September low and December high.
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Chart of the Day: EURJPY
While there is much event risk to focus on globally, the market is also looking closely at this Thursday’s Bank of Japan (BoJ) meeting (no set time), and whether the BOJ cut the deposit rate for the first time since early 2016.
While there is much event risk to focus on globally, the market is also looking closely at this Thursday’s Bank of Japan (BoJ) meeting (no set time), and whether the BOJ cut the deposit rate for the first time since early 2016. The swaps market has discounted a 76% chance of a cut, although, I feel this is too high and see upside risks this week in the JPY. That said, the BOJ will be cognisant not to cause too great a reaction in the JPY and will offer an outlook that keeps JPY bulls from pushing the JPY too much higher.
Of course, there is more to trading the JPY than simply the central bank meeting, and broad market semantics and implied volatility are equally important. It certainly doesn’t feel as though we will see a sharp pick up in implied vol, that is unless we’re genuinely disappointed in the Fed’s outlook or we see a negative turn in the US-China trade talks. So, the EURJPY short positions may face headwinds if market sentiment continues to improve.
Technically, EURJPY looks interesting, with price working in a channel, and with a series of lower highs, should we see 120.37 give way, then it could see price head towards horizontal support at 120.03, where we’ll be looking for buyers to support. A break of 120 and it’s onto the 20-day EMA.
I have focused on downside levels, but on the other side of the trade, I'll turn outright bullish on this pair on a close through 121.35.
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