EUR/JPY: Consolidates ahead of the next downside catalyst

EUR/JPY has been developing a case for the downside at the lowest levels for 2019 in recent days. Indeed, the Yen has continued to attract safe-haven flows which continue to pressure the cross below the 1st Aug downside stick's low of 118.91.

The latest CFTC reports noted that safe-haven demand had pushed the level of JPY net positions back into the positive ground for the first time since November 2016 and last week, net longs extended further. However, in more recent trade, the Yen has lost some ground on the glimmers of optimism surrounding the outlook for US/Sino trade talks - The market also needs room to breathe which has also triggered profit-taking at extremes. However, the risks have not gone away and geopolitical headlines will likely continue to pressure risk assets and underpin the Yen's upside. 

ECB and Germany are a key focus

What could be more central to markets this week will be the central banks, so long as there are no major shifts in geopolitics. The market has been turning its attention to the prospect of policy easing from the European Central Bank next month and recent data from Germany is certainly laying the foundations for a significant move from the central bank. It is hardly surprising that Net EUR short positions increased last week for that matter, although they remain below the levels achieved in late July - which only embeds the case for further shorting to come. However, in recent trade, the euro has found some demand on talks of fiscal easing from Germany.

"Our base case continues to see the ECB delivering a complete package of rate cuts, QE and tiering at the September meeting," analysts at TD Securities argued. "However, we also believe that the current pricing in the rates space seems rather too extreme. This could suggest that we could see profit-taking as we head into the September ECB meeting. The next test for duration comes on Wednesday when Treasury launches its new 30y Bund at negative yields for the first time."

Meanwhile, the week ahead comes with a number of key events, not least, we will have flash PMI data due on Thursday. The Jackson Hole will also be grabbing traders attention for some insight into the Federal Reserve's current thinking. 

EUR/JPY levels

The bottom is located at 117.51, a bullish pin bar left on the 12th August, but daily closes below there will open risk to 114.50. 119 is a key resistance dating back to Feb and Mar 2013. 

"Initial resistance is the 20 day ma at 119.32 and the 120.06 25th July low. Key short term resistance is the 55 day ma and the 3 month downtrend at 120.94/121.05. The market will need to regain this to reassert upside interest. Support at 117.40/19 guards the 114.86 2017 low. The break lower last week saw the market erode a 2012-2019 support line and this leaves a negative bias entrenched while below the downtrend,"

analysts at Commerzbank argued.