Grab your popcorn and find a seat, because this could be an eventful week for the euro & yen.
All eyes will be on the Bank of Japan (BOJ) and European Central Bank (ECB) meeting on Thursday.
Both central banks are notoriously dovish and are expected to leave monetary policy unchanged. However, it may be unwise to label these events as snoozers given the rising inflationary pressures in Europe and concerns around Japan’s economic outlook.
Before we discuss what to expect on Thursday, it is worth keeping in mind that the Euro has depreciated against almost every single G10 currency this month, excluding the dollar and Japanese Yen.
October has also been rough and rocky for the yen, which is down against all its major counterparts as of writing.
Given how our focus is on the ECB and BOJ meeting, our trade of the week will be the EURJPY which up 2.8% in October.
The EURJPY is certainly bullish on the daily timeframe as there have been consistently higher highs and higher lows. However, bears seem to be lingering in the vicinity with prices wobbling above 132.0 as of writing.
What to expect from Thursday’s BOJ meeting
If you are based in the United Kingdom or European timezone, the BOJ policy meeting usually ends in the early hours of the morning.
Markets widely expected the central bank to leave monetary policy unchanged. As inflation rages on across the world, Japan is still fighting an ongoing battle against deflation. Investors will direct their attention towards the BOJ's latest quarterly growth and price forecasts. There has been speculation over the central bank downgrading its economic growth forecast for the fiscal year thanks to rising import costs and supply bottlenecks. Inflation forecasts are also expected to be downgraded despite Japan’s core consumer prices rising in September for the first time in 18 months.
The yen may weaken if economic growth and price forecasts are downgraded, with further losses on the card if the statement strikes a dovish tone.
How about the ECB meeting?
The European Central Bank monetary policy statement will be released at 12:45 pm UK time with the press conference held at 1:30 pm.
Earlier we highlighted how the ECB was widely expected to leave interest rates unchanged. However, there are some key things to look out for during the policy meeting and press conference.
- Euro-area inflation has jumped to the highest level since 2008 September. It will be interesting to hear what President Christine Lagarde has to say about this. Last week she stated that inflation is largely transitory and unlikely to last. Will she drop the same line when quizzed by journalists on Thursday?
- Markets are pricing a strong chance of a rate hike by the end of 2022 but the European Central Bank is expected to douse these expectations. What language will Lagarde employ?
- How about the mammoth 1.85 trillion-euro Pandemic emergency purchase program (PEPP) which expires in March 2022? Markets expect it to be extended beyond March but when it will end remains a mystery. Will this be at the end of December 2022 or beyond?
Now, this is where things get interesting. If both the BOJ and ECB strike a dovish tone – the EUR and JPY are likely to weaken against each other. Such could result in volatility and choppiness until one loses the tug-of-war.
When looking at the EURJPY, prices remain bullish. But the question that comes to mind is whether the currency pair is experiencing a pullback or the start of a downtrend? While the pending central bank meetings could play a role in where the EURJPY concludes this week, the technicals must not be overlooked. A solid breakdown below 132.00 could open the doors towards 131.40 and 131.00. A move back above 132.80 could inspire an incline towards 133.47 and 134.00.
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