eurjpy may see further short term downside pressure as fomc boj looms 1846692017

Another busy day today and tomorrow for market strategists as we decipher the potential impacts on the foreign exchange market from today’s FOMC at 1300 GMT follow by Thursday, 16 March BOJ monetary policy decision out at 0200 GMT.  Let’s us first consider the fundamental factors.

Fundamental factors

• Latest Fed fund futures pricing data as at 14 March 2017 from the CME FedWatch tool, it has indicated a probability of 90.8% that the Fed will hike interest rate by 25bps to bring the Fed fund rate to 0.75%-1.00% range today. A 25bps hike is likely not to have an impact on the markets. Therefore, the potential catalysts to drive up further USD strength comes from the tonality of the monetary policy statement and the “dot plot” that indicates the future forecasted Fed fund rate movement  from the Summary of Economic Projections that will be release today together with its monetary policy decision.
• Changes in tonality of the monetary policy statement – From its previous two statements from the December 2016 and February 2017 meetings, the Fed had choose to maintain a neutral stance on survey-based measures of longer-term inflation expectations. It stated that such expectations were almost unchanged on balance. In a recent survey conducted by the Federal Reserve Bank of New York in February 2017 found that U.S. inflation expectations in a year ahead had rose for the second consecutive month in January to 3% from 2.8% in December 2016 and 2.5% in November 2016, a highest level not seen since mid-2015. Even the longer term inflation expectation (three years ahead) was up 2.9% from 2.8% in December 2016.  Therefore, there is chance that the Fed may sound more upbeat on future long-term inflation expectations that can solidify the pace of the remaining two projected interest rate hikes for 2017 which can support further potential USD strength in the short to medium-term (1 to 3 weeks).
• Fed’s “Dot plot” –  In the December 2016 FOMC meeting, FOMC members had forecasted a median three 25 bps hike by the end of 2017 and I think it will remain status quo today because fiscal policies proposed by U.S President Trump still lack details and clarity. In addition, latest data on business fixed investments are still lacklustre where core capital goods (ex defence & aircraft) orders for January 2017 fell to 0.4% y/y, its first decline in four months.
• BOJ – In the previous monetary policy meeting held in September 2016, BOJ had introduced another “innovative “policy tool called “Yield Curve Control” where it will fix the benchmark 10 year JGB yield at around 0%. However, since its implementation of “Yield Curve Control” the yield on the 10-year JGB has started in inch upwards to 0.095% as at 15 March 2017 from 0.016% seen at the end of November 2016. Also, the JGB 10- year yield had spiked to 0.150% in early February 2017, the highest in twelve months.  Therefore, it seems that BOJ had faced a challenge to keep local bond yields down as the available pool of JGBS in the secondary market continues to shrink. Therefore, BOJ may introduce a range for its 10-year JGB yield target to better manage its asset purchases programme. However, if such a move is being adopted, market is likely to view it as a tightening of monetary policy that can cause the JPY to strengthen in the short to medium-term.
• BOJ –  Core consumer price inflation had risen by 0.1% y/y in January 2017 which ended 10 months of consecutive declines.  In the coming meeting, BOJ may upgrade its near-term inflation outlook forecast to 0% to 0.5% from 0%. A potential short to medium-term JPY strength catalyst

With reference to our previous short-term technical outlook on EUR/JPY dated on last Thursday, 09 March 2017, the cross pair had rallied and hit our upside target/resistance at 122.28/44 (click here for a recap).

Now, let’s us examine the latest technical elements for EUR/JPY.

Short-term Technical Outlook on EUR/JPY

(Click to enlarge charts)

Key technical elements

• Based on the Elliot Wave Principal and fractal analysis, the cross pair had moved within expectation as per highlighted in our previous report. From its 25 February 2017 low of 118.19, the EUR/JPY has completed a 5 wave impulsive up move of a minor degree with a projected extended 5^th wave target at 112.97 (1.00 projection of the low of wave 1 to high of wave 3, projected from low of wave 4 which was closed to Monday, 13 Mar 2017 high of 122.89).  Therefore, the EUR/JPY now faces the risk of a corrective down move to retrace some of the gains from the recent 4 % rally. The current decline from 122.89 high is likely to have completed 3 waves (i, ii & iii) of a 5 wave minor degree corrective down move of a higher time frame wave labelled as a. Right now, the EUR/JPY may be underdoing the minor rebound, wave iv with potential resistances at 122.11 and 122.25 before the bearish impulsive wave v materialises.
• The significant near-term support rests at the 121.33/18 zone which is defined by the former swing high areas of 16 February/04 March 2017, the ascending trendline support from 25 February 2017 low and the 38.2% Fibonacci retracement of the recent rally from 118.19 low to 13 March 2017 high.
• The hourly RSI oscillator has exited from its oversold region but there is no bullish divergence yet and it remains below its resistances. These observations suggest that short-term downside momentum of price action remains intact.

Key levels (1 to 3 days)

Intermediate resistance: 122.11

Pivot (key resistance): 122.25

Next support: 121.33/18

Next resistance: 122.90

Conclusion

The EUR/JPY may start to see further short-term downside pressure after a potential push up to test the intermediate resistance at 122.11 with a maximum limit set at the 122.25 pivotal resistance. Thereafter, it is likely to undergo another down leg to target the 121.33/18 support in the short-term (1 to 3 days).

On the other hand, a clearance above 122.25 is likely to invalidate the preferred bearish scenario to see a squeeze up to retest the 13 March 2017 swing high area of 122.90

Charts are from eSignal

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