EUR/JPY: Bears could be back after Fed, eyes 134.25

The EUR bulls had an upper hand for almost a week, pushing the EUR/JPY pair to a high of 137.09 on Monday. The gains witnessed in the previous session were mainly on account of falling rate hike bets in the US and unwinding of risk trades funded by common currency after the Chinese equity markets suffered biggest single day fall since 2007.

A day ahead of the FOMC statement, the low yielding EUR has been ditched once again on signs of stability in the major European equity markets. Consequently, the EUR/JPY spot has edged lower to 136.50 levels, after having faced rejection earlier today at 136.96 (200-DMA).

The Fed is not expected to move rates tomorrow, although markets would be interested to know if the Fed continues to stay non-committal with regard to the timing of interest rate hike or hints a rate hike in September or December. Furthermore, a lot also depends on whether the Fed puts more emphasis on overseas turbulence – Chinese equity markets, which will be read as dovish for the USD. But the statement is also expected to cheer the fact that the Greek crisis is out of the way for now.

Fed’s non-committal stance would shift focus to Chinese equities

At the moment, the EUR is being treated as a funding currency. Thus, if the Fed stays non-committal and expresses concerns regarding Chinese markets, a broad based USD correction can be expected, accompanied by a drop in the treasury yields (Yen supportive) and strength in the equity markets. Euro too would be buoyed by the dovish Fed statement. Consequently, we may not see much impact on the EUR/JPY pair, although doors would be kept open for a sell-off in case the Chinese equities stabilize and recover losses in the near future. That would be another step closer for the Fed towards rate hike and bearish for the EUR.

Fed rate hike hint could push EUR/JPY lower

Meanwhile, a hint at a possible timing of the lift-off could trigger a broad based USD rally. In such a case, both EUR and JPY could end up losing against the USD. However, if the equities tank on a hawkish stance, the JPY could turn out to be an outperformer. On the other hand, the EUR stands to be the biggest loser in case the Fed hints at a rate hike mainly on account of diverging monetary policy path. Moreover, Fed moving towards the rate hike would also open doors for a similar action from the BOE (Carney stated earlier this month that UK rates tend to rise slower than in the US). Thus, sell-off in the EUR/GBP could also weigh over the common currency.

EUR/JPY – Head and Shoulder on the daily chart

• In case of a non-committal stance from the Fed the technical factors may dominate the trading.

• The daily chart clearly points to a head and shoulder formation. Repeated failures to take out 200-DMA from July 1, could open doors for a sell-off towards the neckline support at 133.30.

• A negative closing today could trigger a fall to the immediate support at 134.25, a break below which shall open doors for 133.30.

• On the higher side, only a daily close above 137.00 could bring in fresh bids and push the pair higher to 138.80-140.00