The U.S. dollar slid against the euro and Japanese yen today after the Commerce Department said that U.S. retail sales edged up 0.9% in March, the first gain in four months but still missing the Wall Street consensus forecast of 1.1%. Retail sales excluding autos rose just 0.4%, also missing the forecast of 0.7%. 

The International Monetary Fund (IMF) said today that it sees economic growth in the eurozone to pick up a bit, to 1.6% from the previous forecast of 1.3%, but warned that the outlook is still fragile with the Ukraine crisis and uncertainty over Greece. Although the IMF characterized the U.S. economy as “robust”, they revised their growth forecast to 3.1% this year and next, from 3.3%, as currency headwinds restrain growth.

The recent pullback and consolidation of the U.S. dollar could be temporary, as there is pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar. Sovereign and corporate borrowers outside the U.S. owe a record U.S. $9 trillion in the U.S. currency, much of which will need to be repaid in the coming years, according to Bloomberg.

The Greek debt crisis and the European Central Bank (ECB) quantitative easing program have put selling pressure on the euro since the beginning of 2014, and the euro will sink below parity with the dollar before the end of this year, said Morgan Stanley on Monday. The EUR/USD and EUR/JPY, which tumbled 12.67% and 12.29% year-to-date, respectively, could continue to fall further as Greece is continuing to drag their feet and has failed to reach any deal with the European Union and the IMF. 

According to the Financial Times, Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April. A warning of an imminent default by Greece’s government could be seen as a negotiating tactic. Nonetheless, a default would almost certainly lead to the suspension of emergency ECB liquidity assistance for the Greek financial sector, meaning the closure of Greek banks.

The downward pressure on the euro against the Japanese yen could persist as the global central banks added to their yen holdings in order to keep the ratio of Japan’s currency constant in dollar terms, as the yen tumbled against the greenback at the end of 2014, according to Bloomberg. The yen’s share of global reserves is about 4 percent in terms of the dollar.

Currency strategists, including Mr. Robert McAdie, Global Markets Head of Research and Strategy at BNP Paribas, maintains a bullish outlook on the USD/JPY and set the near-term USD/JPY target level of 125 yen per dollar. Although a weak yen helps lift Japanese exports, some Bank of Japan officials have concerns that a further decline in the Japanese currency could dampen consumer spending, which accounts for around 60% of gross domestic product.

Mr. Koichi Hamada, a consultant to Mr. Shinzo Abe on economic policy, said in an interview with Bloomberg on Tuesday that an exchange rate of 105 yen per dollar would be “appropriate,” while he doesn’t think the yen will fall much further and that 125 yen per dollar wouldn’t be justified. In short, Japan may want to cap the USD/JPY at 125 yen per dollar.

From our technical viewpoint, the EUR/JPY broke out of the 6-year long falling wedge chart pattern in late 2012. The EUR/JPY turned bearish as it reached the projected price, at around 150 yen per euro in December 2014, where the projected price is determined by adding the width at the top of the pattern to the point of breakout. Selling has intensified as a death cross emerged in late February.

The EUR/JPY has fallen 15.05%, from the 52-week high of 149.77 yen per euro, and is now consolidating in the range between the 127 yen per euro and 130 yen per euro levels, where 128.47 yen per euro is the 38.2% Fibonacci retracement. As pessimism around the euro persists, a breakdown at the 125 yen per euro level could send the EUR/JPY to the 121.90 yen per euro, or 38.2% Fibonacci retracement, and the 120 yen per euro level, where the euro might find some support.