EUR/JPY: Fragile on 125 handle on dovish ECB outlook

• EUR/JPY has popped, piercing through the 125 handle as the dollar sinks.
• The cross is benefitting from a pop in the euro through the 1.13 handle as the market breaths, potentially bating in the bears again. 

EUR/JPY has been sent up to a key resistance level through 125 the figure as EUR/USD bears get squeezed below the 1.13 handle as price moves to test territory around the 1.1320 level with room to the 1.1340/50 trend line resistance to go. There is little out there supportive of the euro at this stage following a number of data disappointments from leading economic powers such as Italy, France and Germany, the ECB has backtracked on its monetary policy forecasting.

ECB outlook weighs on the euro

Three ECB officials that have been historically at the hawkish end of the Governing Council spectrum spoke earlier today and their tone has switched to dovish the in economic growth. 

The President of the Dutch central bank Klaas Knot said inn an interview in the Financial Times, that ‘at this moment a wait-and-see attitude is probably the optimal attitude…we are now going through a couple of quarters where growth has fallen below potential, which means the build-up of inflationary pressures will also incur some slight delays," adding, ‘we will have to be patient and also, in my view, modest with respect to the precise moment at which we can expect inflation to converge toward our medium-term objective’. 

 Bundesbank President Jens Weidmann said that the weakness in the economy had been a ‘ bit more protracted’ than initially thought. Ewald Nowotny, the Governor of the central bank of Austria, signalled that the ECB would re-consider its outlook for policy rates ‘in the summer’. 

Analysts at ABN AMRO noted that the ECB’s forward guidance stated that interest rates are expected ‘to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’. 

"We think the forward guidance could be amended in June, to rule out rate hikes this year."

With respect to the dollar, given that the divergence remains between the ECB and Fed and considering the short term yield advantage that the dollar maintains, investors are treating it as the go-to currency despite the Fed's neutral switch at the turn of the year. However, USD/JPY has found a base on the 110 handle, albeit, risk sentiment can flip at a switch and should stock markets plunge again, be it on a trade war shock or a deeper sentiment for a global contraction in growth, EUR/JPY would follow in tow of broader financial markets flows.

EUR/JPY levels

Analysts at Commerzbank explained that EUR/JPY last week failed ahead of the 55 day ma at 125.97 and the 126.28 resistance line:

"It has eroded the near term uptrend and in doing so leaves the market vulnerable to further losses towards the 123.40 mid-January low and potentially the 122.85/38.2% retracement and the 121.900/50% retracement. In early January the market saw a major spike lower that eroded the 2012-2019 support line at 119.63 – the low was made at 117.845. The move looks exhaustive and the market is consolidating."