EUR/JPY – Market Expect ECB Rate Cut, Breakout Potential

The European Central Bank (ECB) is scheduled to deliver their monthly rate decision later today. Market is anticipating a 25bps cut this time round as Mario Draghi seeks to revitalize the European region financial system and deepening recession. However, market watchers are remaining skeptical over the effectiveness of a rate cut on the Euro-zone economy. Overnight borrowing rate for EUR has been close to 0% for the past year, and reducing ECB’s policy rate from 0.75% to 0.5% will not improve European banks financial standing, unless ECB allows for negative rates which is highly unlikely.

Nonetheless, Draghi may still want to cut rates due to the fact that EUR/USD remain highly inflated, according to Draghi and ECB estimates that is. Draghi would very much prefer to see EUR/USD closer to 1.25 levels, and lowering the policy rate may go a long way to bring down EUR and help exports of European countries. Even though no cries of foul play has been made from the Euro continent, the effect of BOJ’s JPY weakening policy is clear for all to see. Germany’s manufacturing PMI has been showing shrinkage, which isn’t all too surprising considering that Germany’s tech and automobile products are directly competing with similar Japanese exports in US and China markets. A lower EUR will definitely help Germany regain some of the edge that Japan has been enjoying recently.

Daily Chart

With that in mind, it is highly likely that Draghi may go with the flow of market expectations and carry on with a rate cut, as not doing it may have strong ramifications – EUR strengthening – which is direct opposite of what Draghi wants. What does it mean for EUR/JPY then? Price is primed for a strong breakout either side of current wedge which is in play since the decline from April’s high. Knowing that price may either move up or down strongly following today’s ECB rate decision, it is highly probable that price may easily break either the top or bottom wedge today.

However, please do not interpret this as a license for price to go up or go down indefinitely. Breaking the wedge is just the first step, bulls will still have to watch out for the 131.0 level which will provide resistance, and a full breakout may only mature when the level is broken, with bullish acceleration potentially bringing price faster higher. On the bearish front, 127.0 may still provide support, but with price staying around 128.0, it is likely that 127.0 may be broken in conjunction with the break of bottom wedge within the same news event/candle, which can usher in bearish acceleration towards 120 with 123 – 124 providing interim support.

Stochastic readings prefer a bearish scenario with readings currently pointing down and Stoch/Signal line looking to diverge once again – suggesting stronger bearish momentum coming.

Hourly Chart

From the hourly chart, price is also facing potential bearish breakout scenario. If price maintain current pace, we could be testing Channel bottom before the ECB news event which will allow price to breakaway from the Channel, adding bearish pressure for the Daily Chart. However, in the event of a bullish outcome, price may push up to retest Channel Top, which may also break the descending trendline, allowing for stronger bullish momentum towards Channel top and also potentially allowing bulls to use 129.0 as support after hitting Channel top. Staying above 129.0 will open up 129 – 130 consolidation range for bulls and allow them to use the band to launch a retest of 131 eventually.

Fundamentally, with USD/JPY coming down with BOJ speculation tapering off, a longer term bearish scenario for EUR/JPY fits better. This is in line with what the technicals are showing – bearish breakout may find stronger follow-through as compared to bullish breakout. Nonetheless, traders should prepare themselves for a potential ECB surprise, where Draghi chooses not to cut rate but instead save this option as a wild card for future uses.

More Links:
WTI Crude – All time high inventory levels pushing price down
GBP/USD – Moves Higher Again to Above 1.56
AUD/USD – Falls Sharply Back Under 1.03

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.