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Andreas Zanin
Analysis | December 10, 2020

ECB In Focus Outlook for EUR/JPY and CHF/JPY

We have the ECB today and the euro is firming into the meeting and if the ECB does as expected the general view is the euro will continue to firm. In this article, we are going to look at two crosses EUR/JPY which is in a strong up trend, and also CHF/JPY. In terms of the latter pair the CHF will be influenced by ECB action due to the SNB wanting a lower CHF against other major currencies particularly the Euro…

“The ECB will also struggle to address the euro’s trend appreciation. Its disinflationary implications are unwelcome, but the rise in the currency is beyond the central bank’s control,” (Brian Martin, Senior International Economist at ANZ Bank.)

The general consensus view is the ECB will boost and extend the PEPP today, conforming to forecasters. Economists are predicting €500bn could be added by ECB despite its €6.9trn balance sheet. Credit and funding will probably see an adjustment to the targeted long-term refinancing operations (TLTROs).

The ECB is concerned about a strong euro which is hurting exports as well as adding to deflationary pressure in the zone so what can they do to dampen euro upside?

“Compared to consensus, we see dovish risks dominating today’s decision. In our view, the most likely non-consensus outcome is for a longer extension of TLTRO (cheap loans to banks) and PEPP (asset purchases). The resulting impact would be suppressed rates volatility for much of 2021, and an inability to follow rates in other currencies higher.” (ING)

Also, after the ECB’s October meeting, the market priced in a 10bp cut within six months but the market as we come into the latest meeting is not pricing a cut at all. The ECB could use mention that they are an option going forward to dampen euro upside.

JPY Oversold Relative to Yield Spreads

In terms of the JPY if we look at bond yields its oversold on both the EUR and CHF and a dovish ECB which would probably lead to a SNB response has the potential to rally the JPY. Key levels of support and resistance below.

Technical Analysis Key Levels

EUR/JPY DAILY CHART: We have rallied up to try and breakout above the September highs a Breakout to the upside would target 128.00. However, with the EUR overbought if we break below 126.00, we could see a sell off to 124.00 to correct the EUR’s overbought condition.

CHF/JPY DAILY CHART: We are now trying to break to new daily chart highs and at 118.00 we have 2019 weekly resistance – if we do break higher, we expect the rally to be short lived. In terms of support its at today’s low just above 117.00. If we can break below 116.80 we could target the 114.70 level which would correct the CHF’s overbought extreme.

 

 

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