We expect lower prices in EUR/JPY a review of the fundamentals sentiment and technicals are below.
In terms of the euro bullish argument, it’s now priced in and is based on ECB rate hikes, with the market seeing a very hawkish ECB going forward…
Good News Priced In For The Euro
ECB President Lagarde confirmed this week that the bank would bring rates out of the negative territory by the end of September but the market is already discounting rate hikes of 1% this year…
We don’t think the ECB will achieve 1% and while Lagarde has confirmed rate hikes she has also stressed patience in terms of the speed and timing of them.
It’s all very vague with no specifics and we don’t think the ECB can deliver what the market thinks it will…
Short-term money markets are implying the ECB will raise its key rate by 105 basis points by year-end. That extent of tightening would be much more than the two hikes it made in 2011 as the Eurozone emerged from the Great Recession.
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Those hikes triggered a broad loss of market confidence in the euro and saw a decade of poor economic growth. The ECB will disappoint in terms of size and speed of interest rate hikes.
If we look at the economy we can see that leading indicators like the PMIs are slowing…
While Christine Lagarde says that the ECB is not considering a recession in our view it’s “odds on” in our view as the shock of energy and other commodity price rises in relation to the Ukraine conflict is high.
THE Case for More Yen Strength
The good news is priced in for the EUR but what about the JPY?
Investors have gone short the JPY based on its low yield but the Yen has shown some strength and there will be more to come as we move into risk-off.
We have noted in other articles that we face the prospect of a big global growth slow up and also the potential for far more downside in the stock market which are both historically bullish for the Yen.
If you actually were to see risk aversion increase the Yen will soar higher.
On the chart below, if we were to rally above the first resistance level we would see it as a sell back through the level with a stop behind second level resistance.
If we don’t rally and fall through today’s low we would expect a decline down to major support at 128.00 to take out the large number of speculators who are long on stop.