EUR/JPY Forecast: Poised to test 133 ahead of Fed minutes?

EUR/JPY reversed its upside momentum, having faced rejection at 137 barrier on Monday and has dropped nearly 250 pips since then. EUR/JPY now trades lower by -0.92% at 134.50 levels, quickly bouncing-off a brief dip below 134 handle. The cross remains heavy largely as the shared currency was relentlessly sold-off during the European session after European Central Bank (ECB) officials separately announced extension and acceleration of the QE asset purchases his summer. Moreover, weak German ZEW survey also added to the downside in the cross as in line EZ CPI figures failed to lift the euro. On the JPY side, the dollar-yen pair remained supported just ahead of 120 mark, doing little to move the EUR/JPY cross.

Technically, on the daily chart, EUR/JPY trades in a rising wedge formation and has dropped sharply from four month highs at 136.96 reached on Monday. The cross breached the 5-DMA and 10-DMA supports and is likely to retest 134 handle. The daily RSI at 54 aims lower suggesting more room for declines. Hence a break below daily lows at 133.95, EUR bears are expected to dominate, dragging the pair to the trend line support located at 133 levels. A sharp sell-off could trigger below a break of the last which may knock-off EUR/JPY to 100-DMA located at 132.03. However, a failure to breach 133 levels, the pair may rebound higher for a retest of 134 handle and beyond.

Fundamentally, the US dollar remains strongly bid across the board, rebounding sharply from fresh four month lows reached at 93.02 last week, boosted by rising treasury yields ahead of Wednesday’s Fed meeting minutes.

Later today, the US dollar is expected to receive fresh impetus from upbeat house starts and building permits data from the US. The market is expecting both housing starts and permits to have improved last month, climbing to an annual rate of 1.02 million and 1.07 million units, respectively.

"Economic data momentum has remained extremely disappointing over the past several weeks, but we will look to recently strengthening housing data to provide some counterbalance to the broad-based weakening trend," analysts at TD Securities explained in their latest weekly note.

Moreover, showing signs of recovery, the housing inventory has tightened creating a faster pace of appreciation, as existing home sales rebounded robustly over the past two months, the National Association of Realtors reported.

Meanwhile, broad based US dollar strength is expected to have major negative impact on the euro as compared to that on the Japanese currency. The yen stands resilient across the board awaiting fresh cues from the Japan’s GDP figures due tomorrow. The market forecast for Japanese GDP growth in the Q1 2015 is 0.4%, unchanged from the rate of growth recorded in the December quarter. The annual rate of growth is expected to tick up from 1.5% to 1.6%. While 0.4% growth is a big turnaround from the 1.7% plunge in GDP recorded in the June quarter last year - when the sales-tax hike from 5% to 8% hit hardest on demand.

On the other hand, EUR/USD extends its corrective slide from swing highs above 1.14 handle and trades below 1.12 handle, pressured mainly by Greece concerns as it still remains in the headlines as the country struggles to pay its obligations. While the latest comments from ECB policy makers on the asset purchases keeps the shared currency undermined.

According to the CFTC and Rabobank's research, USD longs fell for a fourth consecutive week as investors repositioned for a later first Fed rate hike. Although net USD positions are still firmly in long territory, they are at their lowest level since December last year. EUR shorts pared back further, to levels last seen in March. Better euro zone economic data are supportive, though the ECB’s QE program and Greek concerns are a drag on the EUR.