EUR/JPY: Draghi'n the euro down

The release of this morning’s European Central Bank (ECB) monetary policy statement was predictably uneventful, with the central bank leaving its main refinancing rate at 0.05%, its deposit rate at 0.20%, and its marginal lending facility at 0.30%. That said, the ongoing press conference with ECB President Mario Draghi has still managed to inject some volatility into the markets. There were a number of headlines from the first half of Draghi’s speech:

• RENEWED RISKS TO THE DOWNSIDE HAVE EMERGED

• TO INCREASE ISSUE SHARE PURCHASE LIMIT FROM 25% TO 33%

• ASSET BUYS TO RUN UNTIL SUSTAINED ADJUSTMENT IN INFLATION

• ECB CAN ADJUST SIZE AND DURATION [OF QE PROGRAM} IF NEEDED

• ECB TO USE ALL TOOLS WITHIN MANDATE IF NEEDED

• ECB CUTS GDP GROWTH FORECASTS FOR 2015-2017 (including down to 1.7% in 2016)

• ECB LOWERS EUROZONE INFLATION FORECASTS FOR 2015-2017 (including down to 1.1% in 2016)

• MAY SEE NEGATIVE INFLATION IN COMING MONTHS

• ECB WILLING AND READY TO ACT IF NEEDED

In case you’re not well-versed in central banker lingo and policies, this is a very dovish (downbeat) assessment of the economy. In particular, the decision to increase the share repurchase limit suggests that the central bank would like to increase its purchases in certain types of assets, a possible precursor to expanding or extending its QE program in the future.

As Draghi took the stage, some analysts jokingly pointed out that he was wearing the same tie as the day when he infamously promised to do “whatever it takes” to preserve the euro, and interestingly, some of today’s comments (“can adjust size and duration [of qe] if needed” and “willing and ready to act if needed”) were reminiscent of that bold statement. Traders definitely took the hint, driving the euro and global bonds lower, while stocks across the world have rallied in the wake of Draghi’s prepared remarks.

Technical View: EUR/JPY

Though EUR/JPY managed to close marginally higher yesterday for the first time in eight trading days, the pair is once again trading lower today. The pair has already reached the measured move objective of August’s double top pattern at 135.00, though of course that doesn’t rule out further weakness moving forward. Indeed, the pair is making a run at the four-month low around 133.25 as we go to press.

With the MACD trending lower below its signal line and the “0” level and the RSI indicator not quite in oversold territory, the EUR/JPY could easily test that level later today. Unless Draghi drops a late dovish bombshell, buyers may step in to defend that level, but the near-term trend clearly remains to the downside, so traders may want to fade any brief bounces. Meanwhile, if the 133.25 floor is eclipsed, a continuation down to the 61.8% Fibonacci retracement at 131.80 or lower is possible heading into next week.