eurjpy risk of minor pull back before new rise as ecb looms 1846112017

Later today at 1245GMT, the European Central Bank (ECB) will announce its latest monetary policy decision follow by its policy statement and press conference by ECB President, Mario Draghi at 1330GMT.

Since the start of 2017, several key macroeconomic data for the Eurozone has been encouraging;

• February 2017 Consumer Price Index (CPI) had continued to inch upwards from its November 2016 reading of 0.6% y/y growth to 2% y/y. This latest set of inflation data has managed to notch three consecutive month of positive growth above 1% y/y since December 2016.
• The Markit Manufacturing PMI for February 2017 stood at 55.4 which highlights a sixth consecutive month of increases from September 2016 and also it was the strongest expansion in factory activity since April 2011. The Markit Services PMI for February 2017 also registered a strong reading of 55.5 after it hovered around the 53 level for the entire 2016. This latest reading from the services industries was the strongest expansion seen since May 2011.

Despite this set of positive data, we do not think it is sufficient enough to change the current stance of ECB’s monetary policy to a hawkish mode and maintain its extended quantitative easing program to December 2017.  Several notable reasons are as follow;

• The core CPI that strips out energy and food prices is still subdued at a reading of 0.9% y/y growth in February which has been flat below 1% since January 2016. Thus, annual core inflation rate is still below the 2 % threshold that ECB deems as a state of price stability for the Eurozone economy.
• Financial shock again from Greece – withdrawal of funds from the EUR86 billion bailout rescue package granted to Greece in August 2015 has hit a road block. There are disagreements among the creditors, IMF and EU that Greece has met the creditors’ set of criteria in order to receive another tranche of aid funds from the bailout package.  Greece and its creditors have failed to reach an agreement and another round of bailout negotiations and review on the current economic conditions of Greece had just started on 28 February 2017. Greece needs to fulfil its next debt repayment of EUR7 billion due in July 2017 and without the aid funds, Greece faces the risk of a default.
• Eurozone political risk – Netherland will hold its General Election on 15 March 2017 with the French 1^st round of Presidential Election on 23^rd April 2017. Given the rise of populism and if any anti-Euro politicians gain a foothold, it can create a negative shock that erode business and consumer confidence in the Eurozone.

Therefore in the press conference later, ECB President Mario Draghi is likely to portray “balanced tone” on ECB’s guidance even though the consensus is an expectation of ECB to upgrade its headline inflation outlook for 2017 from 1.30% to a median forecast of 1.80%.

Now, let us take a look at the EUR/JPY cross pair from a technical analysis perspective

Short-term technical outlook on EUR/JPY

(Click to enlarge charts)

Key technical elements

• Since its minor swing low of 118.19 printed on 25 February 2017, the EUR/JPY cross pair has been evolving in a short-term  bullish ascending channel with its lower boundary acting as a support now at 120.42 which also confluences with a Fibonacci cluster (see hourly chart).
• The hourly Stochastic oscillator has reached an extreme overbought level which highlights the risk of a minor pull-back at this juncture as upside momentum of price action is overstretched at this juncture.
• The next short-term significant resistances stand at 121.84 and 122.28/44.
• Based on the Elliot Wave Principal and fractal analysis, the EUR/JPY is likely to be undergoing a bullish impulsive structure of a minor degree in place since the 118.19 low of 25 February 2017 that has yet to be completed. From 119.97 low of 08 March 2017, the cross pair is likely in the midst of forming the 5^th wave of this bullish impulsive wave structure with potential end targets set at 121.84 and 122.28/44. Interestingly, these end targets confluences with the graphical resistances as seen on the hourly chart (the upper boundary of the aforementioned ascending channel & the swing high area of 01 February 2017).

Key levels (1 to 3 days)

Intermediate support: 120.75

Pivot (key support): 120.42

Resistances: 121.84 & 122.28/44

Next supports: 119.45 & 118.30

Conclusion

The EUR/JPY may see a further pull-back first towards 120.75 and as long as the 120.42 short-term pivotal support holds, the cross pair is likely to stage another potential upleg to target the next resistances at 121.84 follow by 122.28/44 next

On the other hand, failure to hold above 120.42 may invalidate the preferred bullish scenario for a further decline to test the next supports at 119.45 and even 118.30 (see daily chart).

Charts are from eSignal

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