EUR/JPY – The Good, the Bad, and the Ugly of Eurozone

The Good – German retail sales rose 2.4% Y/Y, versus an expectation of -1.7% and -3.7% previous. M/M also exceeded expectations, coming in at 3.1% vs 0.9% forecast and -2.1% previous. Sales growth getting back in black underlines Germany’s economic health, following recent released improved consumer confidence and lower unemployment figures. Bundesbank is now expecting a full return to growth in Q1 2013, which is a refreshing change earlier this year when multiple Eurozone countries were slashing their growth rates, expecting growth to return only in later part of 2013 or perhaps in 2014.

The Bad – Spanish PMI manufacturing came in marginally better than expected, however the manufacturing industry is still shrinking, albeit at a slower pace at 46.8 vs 46.3 expected. Not something that really instill confidence but certainly things could be much worse.

The Ugly – Italian Parliamentary election continue to drag with no end in sight. The latest attempt to form a coalition Government between 2 parties between Center-Left Democratic Party and Center-Right The People of Freedom has been rejected outright by Bersani, further reducing market confidence. To worsen matters, Italy’s PMI manufacturing was worse than expected at 45.8 vs 47.6 expected. Furthermore, unemployment rate has climbed to 11.7% vs 11.3% expected and 11.3% previous, highlighting the ugly economic conditions in the country.

Though we have conflicting news flooding the wires, EUR remain mostly unimpressed, with EUR/JPY barely moving beyond 50 pips since Asian trading.

Hourly Chart

Hourly Chart showed price initially entering the Kumo after the coalition failure was made known. Price dipped below 121.0 briefly, before German news pushed price higher with Spanish news adding strength to the bullish rally towards 121.50. Subsequently, the Italian news shifted sentiments abruptly and price is currently trading close to the Kumo and 121.0 level (121.05 at the time of writing).

From a Technical perspective, the failure to test 121.50 will weigh on price and invite a retest of 120.5, as it suggest that the move from 121.50 lower has not ended yet. Current bullish Kumo could still provide support, but it is pertinent to recognize that price was already breaching the Kumo before the Germans news came to the rescue. Also, a break into the Kumo towards 120.50 does not negate the bullish bias that the Kumo is suggesting, and is also above the consolidation zone found on Feb 27th, giving bears a lot of space to play with even if a bullish bias is still in play.

Daily Chart

Daily Chart shows a bearish breakout, though it is not clear at the moment whether the breakout has finished with a Doji (or a Morning Star setup) formed immediately after the long breakout candle. This gives us a temporary bullish bias, though bears still have space to go lower before testing the 38.2% Fib retracement.

Fundamentally, we know that Eurozone economics remain weak, which will weigh EUR/JPY down. A large part (or the entire reason) why price managed to climb so high is due to JPY’s weakness brought on by BOJ stimulus threats. However that may end soon as market has been pricing in all future BOJ actions. Also, Yen has proven that safe haven flows trumps all with recent scares from Fed minutes and Italian Elections pushing JPY stronger. Right now we have the sequester cuts staring in our collective faces, and if not handled correctly, we could easily send market to a downward spiral that will strengthen Yen once again. Without Yen weakening, it is hard to imagine EUR/JPY climbing higher on EUR’s strength, and a full reversal may soon follow.

More Links:
EUR / USD – Eases Back Under 1.31
EUR/USD – Under Pressure As Markets Remain Wary
USD/JPY – Yen Steady as Abe Chooses New BOJ Governor

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.