EUR/JPY – Right Back Within Wedge After ECB’s Rate Cut

So Draghi did follow through on market expectations and carried out a rate cut, despite its effectiveness highly doubtful. EUR/JPY dipped lower on the announcement, but bounced back up equally quickly after dipping its foot below 128.0.

There are 2 possible reasons why prices rallied back up after the announcement
(1) Market has priced in a rate cut earlier and hence price actually rebounded due to “buy the rumor, sell the news” behavior
(2) Market believing that rate cut is beneficial for the Euro-Zone which will be a longer-term positive factor in favor of EUR appreciation

There are evidences that support both theories. Google Trends tell us that ECB rate cut gain interest suddenly on 25th April, in line with the onset of bearish decline just under 130.0 for EUR/JPY. This suggest that the decline in prices can be attributed to more speculators and traders alike pricing in a rate cut scenario. Europe bond yields have also fallen significantly after the rate cut, suggesting that demand for European sovereign debt is back due to improve confidence that the Eurozone will survive this financial crisis.

So there we have it, 2 strong reasons why EUR/JPY rallied. So why did price collapsed later?

Well, Mario Draghi did the unthinkable – saying that negative deposit rates are possible. This is a very scary thought, and will be one of the best ways to coerce banks and companies to lend and borrow more money for economic building purposes rather than keeping it inside their bank accounts. However, there is also the risks that your regular Joe on the street may be impacted. Negative rates may result in your standard bank accounts charging you premiums to keep the funds in the bank (something that happened to Cyprus, but Draghi did not really mention that this time round. And to be fair, it is still possible that regular savers are not impacted by negative rates IF ECB institute deposit guarantees, but that is another story for another day). And the implication is that foreign investors with EUR liquid assets may want to clear their holdings in order to eliminate such risk in the future.

Admittedly, the reason given above is rather far-fetched, and perhaps market agrees as well, hence we did not see any strong follow through, and price found support along 128.0 round number together with the confluence of Channel Bottom.

Hourly Chart

From a technical perspective, being supported by Channel Bottom opens up Channel Top as a viable target once more. Stochastic readings suggest the same with readings marginally pointing higher, and may embark on a bull cycle soon. Given the fundamental ambiguity, it will not be surprising to see EUR/JPY getting stuck within the Channel once more as price tend to move sideways when directional factors are absent.

Daily Chart

As mentioned yesterday, a bullish breakout from the wedge may find limited follow-through. That has since been confirmed (with help from Draghi’s comments), and now we are trading right back into the wedge. Given that the apex of the wedge is still a few candles away, we may have to potentially wait for next week if there is no clear winner between bulls and bears after today’s US NFP numbers. However, it is worth noting that the bar for NFP numbers have been set way low especially given the huge disappointment that was ADP employment. As such, the potential for positive surprise is high, and that could mean the EUR/JPY may enjoy a retest of breakout once more. Be prepared for strong pullbacks post breakout as well though, as NFP tends to bring strong volatility but lack directional push. Should we manage close either higher or lower below the wedge, next Monday open will be fairly interesting as we will see if continuation for the wedge breakout can happen – and if the answer is yes, we may have a full week of breakout which will certainly give more time and space for stronger follow-through.

More Links:
GBP/USD – Maintains its Level Around 1.5550
AUD/USD – Bounces Off Support at 1.0220
EUR/USD – Falls Sharply to 1.3060

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