EUR/JPY FX Cross Rate Struggles at Key Fibonacci Retracement Level Ahead of ECB Meeting

Witawat (Ed) Wijaranakula, Ph.D.
Wed Mar 2, 2016

The EUR/JPY currency pair continued to retreat after European Central Bank (ECB) president Mario Draghi said during a hearing on February 15, in front of the European Parliament’s Economic and Monetary Affairs Committee in Brussels, that the ECB won’t hesitate to boost its stimulus in March if it believes recent financial-market turmoil or lower oil prices could further weigh on eurozone inflation. 

The ECB remains concerned about crude oil prices and inflation, as Draghi put it at a news conference after the Governing Council meeting of the ECB in Frankfurt on January 21 that, "On the basis of current oil futures prices, which are well below the level observed a few weeks ago, the expected path of annual HICP inflation in 2016 is now significantly lower compared with the outlook in early December,”. “Inflation rates are currently expected to remain at very low or negative levels in the coming months and to pick up only later in 2016.", said Draghi. 

According to Reuters, the ECB is expected to cut its deposit rate by 10 basis points to – 0.4% at the Governing Council meeting in Frankfurt on March 10, but markets are split over what other steps are likely. Some predict an increase to the 60 billion euros per month asset buys, others see just technical changes to quantitative easing and some expect the bank to unveil a multi-tier deposit rate system.

Concerns about weakening global economies and aggressive Fed rate hikes put buying pressures on the Japanese yen as a safe-haven currency. The fx currency traders have shrugged off the possibility that Japan’s economy could fall back into recession, considering that the Cabinet Office of Japan said last week that Japan's GDP shrank an annualized 1.4% in the fourth-quarter ending December 31, 2015, as weakness in private consumption, which accounts for about 60 percent of the economy, persists.

Japanese retail sales and consumer spending remain weak. The Ministry of Economy, Trade and Industry of Japan said on Monday that retail sales fell 0.1% year-on-year in January after a 1.1% decrease in December, the third straight month of declines. The trade ministry also said that Japan's industrial output rose 3.7% month-on-month in January, compared with economists' median estimate of a 3.3% gain in a Reuters poll, and followed a 1.7% drop in December.

Technically, the EUR/JPY cross rate struggles at a key technical support at 121.90 yen per euro, or the 50% Fibonacci retracement level. The currency pair can bounce off the lower trendline support of the ascending wedge chart pattern at around the 120 yen per euro level if the yen becomes weaker. In the event that the trendline support doesn’t hold, the EUR/JPY could drop to 119 yen per euro, and eventually to 115.33 yen per euro, or the 61.8% Fibonacci retracement level.

According to Bloomberg, Goldman Sachs is unconvinced that the strength of the yen will be sustained, as its chief currency strategist Robin Brooks wrote in a note to clients on February 19 that the bank sees the yen weakening to 120 yen per dollar “in the near term” and 130 yen per dollar by year-end. The median of more than 50 estimates compiled by Bloomberg calls for the yen to slump to 120 yen per dollar by the end of March, and to 123 yen per dollar by year-end.


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