CURRENCIES

Senior Currency Strategist Eric Viloria of Forex.com outlines the issues and events of interest to currency traders in the coming week.

Changing ECB Expectations Support EUR

The European Central Bank (ECB) kept interest rates on hold at 0.75% as expected on Thursday after talks at the prior meeting that indicated a rate cut could be expected soon. More surprisingly, at the ECB press conference, President Mario Draghi stated that the decision to keep rates steady was unanimous and that the region’s economy should recover gradually this year. This helped to lift the euro as speculation of lower interest rates were drastically reduced while the ECB seems content to stay on the sidelines for now.

Draghi noted that the Bank remains focused and committed to its goal of price stability despite record high unemployment levels and negative GDP growth. He highlighted improvements in financial indicators and said that the transmission mechanism is starting to be repaired amid a “reduction in financial fragmentation.” The Outright Monetary Transactions (OMT) is yet to be activated, but sovereign yields have fallen significantly since the program was announced. The Spanish 10-year yield fell below 5% this week after the country raised more than its maximum target in a debt sale. Government bond auctions in other peripheral nations were well received this week, reducing the urgency for countries such as Spain to seek a bailout.

Technically, EUR/USD rebounded significantly this week and broke above the 1.33 resistance level. The pair now faces key upside resistance ahead of the 1.34 figure. Prior highs made in late March/early April are just below 1.34 and the 100-week simple moving average (SMA) is around 1.3385/90. This is likely to be a major level moving forward and a break above could open up a move towards the 1.35 area.

There are still many risks in the Eurozone such as financial problems in Cyprus, which are gaining more attention and continued economic weakness. Recent economic indicators out of Germany have deteriorated and next week, Eurozone industrial production and trade balance figures are due, which can provide more insight into the economic health of the region.

Japan Policy Response Sends JPY Tumbling

There has been a steady stream of JPY-negative rhetoric in Japan from key political and monetary officials. In fact, there is now increasing coordination between the government and the central bank and as the two forces appear to be moving closer together to combat deflation and return the country to economic growth, the Japanese yen has tumbled. USD/JPY rose to its highest level since July 2010 and EUR/JPY advanced to its highest since May 2011 as yen weakness persisted.

Prime Minister Abe reiterated that he wants to strengthen cooperation between the government and the Bank of Japan (BoJ) and said that he wants monetary policy aimed at a 2% inflation goal. BoJ Governor Shirakawa said he will consider the opinions given by the government, but as Abe noted, deciding monetary policy is up to the BoJ (for now). Shirakawa’s term as Governor is up this spring and the government has indicated that it will choose a new BoJ Governor who shares its dovish views. It seems as though the Bank will adopt the new target at its meeting later this month, which underscores the need for additional easing measures as even the 1% inflation goal is being missed at this time.

Yesterday, Japan introduced a fiscal stimulus package of ¥10.3 trillion aimed at boosting economic activity. The spending is said to be seen as increasing GDP by 2% and helping to create 600k jobs. ¥3.8 trillion is allocated for earthquake reconstruction, ¥3.1 trillion will be used to stimulate private investment, and another ¥3.1 trillion for social spending. While this stimulus package has gained a lot of attention, similar spending programs have been implemented in the past with little long-term impact.

For now, JPY-weakness continues to gain momentum but the currency decline appears to be overextended and there is the risk of a correction. Therefore we would be cautious in chasing the yen lower at these levels and would rather look to fade pull-backs. We expect the JPY to move lower in the longer term as officials do everything they can to reduce the value of their currency in an attempt to return to growth and increasing prices.

Key levels to monitor in EUR/JPY are the 200-week SMA around the 115 level to the downside and the 120.00 big figure as a psychological pivot to the upside. In USD/JPY, the 90.00 figure is a key upside pivot and the 86.50 level, which is around where the 23.6% Fibonacci retracement (of the rally from September lows to recent highs) may prove supportive.

By Eric Viloria, CMT, Senior Currency Strategist, Forex.com

Tickers Mentioned: EUR-USD, USD-JPY, EUR-JPY

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