EUR JPY heads back down after dovish Draghi

Not much about the European Central Bank’s (ECB) public pronouncements on Thursday was unexpected. Interest rates remained unchanged this time, as anticipated, after the surprisingly aggressive easing actions presented at last month’s meeting. ECB President Mario Draghi struck an overall dovish tone, reiterating the need to address persistent conditions of low inflation and economic growth risk. At the same time, however, Draghi urged patience in the face of prolonged weakness in inflation, hinting that any further easing will need to wait. Thursday’s ECB press conference skewed towards the dovish side primarily because Draghi kept open the potential for lower rates, in contrast to last month’s conference, when he remarked that he did not expect interest rates to decline any further.

As a result of the dovish, but somewhat mixed, messages from the ECB, the euro rode a volatile wave of market sentiment on Thursday. The currency initially surged due to the conspicuous absence of any rate changes, but then dropped abruptly during and after the press conference when it became clear that Draghi had become more dovish than he was last month.

For EUR/JPY, this price movement was seen as a sharp rise to a two-week high of 124.95, where the 50-day moving average is currently situated, followed by an equally sharp drop that swiftly reversed those gains. As it currently stands, EUR/JPY is trading not far above its new 3-year low below key 122.00 support that was just hit early this week. That low formed a well-defined double-bottom in conjunction with the prior low at 122.00 that was hit in late February and early March.

While the opposite side of the currency pair from the euro, the Japanese yen, has pulled back in the past few days, the bullish trend for the yen has been strong within the last several months. Barring any effective currency intervention by the Bank of Japan to weaken its currency, the yen has a likelihood of continuing its strength after the current pullback. In this event, a more dovish-leaning ECB combined with a supported yen could prompt a breakdown for EUR/JPY below major support at the noted 122.00 double-bottom level. If a sustained breakdown occurs, it would confirm a continuation of the longstanding downtrend for EUR/JPY, with the next major downside targets at the 120.00 psychological level followed by the key 119.00 support level.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.