USD/JPY declines to 108.60 amid fresh risk aversion, all eyes on the ECB

• USD/JPY pulls back as downbeat Brexit headlines renew risk-off.
• Risk tone keeps the pair in the short range since the middle of the month.
• A heavy economic calendar could compensate for the lack of trade/Brexit news.

With the recent uncertainty surrounding the UK’s politics crossing wires, USD/JPY steps back from the previous rise to 108.60 as Tokyo opens for Thursday’s trading session.

The pair recently benefited from the upbeat headlines concerning the US-China trade deal and Brexit, not to forget the US Dollar (USD) weakness on the back of soft data. However, the gains couldn't last long amid fresh threats from the UK. As a result, the recovery in the US 10-year US treasury yeilds couldn't last long while Wall Street also closed with minor gains.

Risk reshuffle

Trade/Brexit keeps the markets on toe with the latest news receding the fears of a hard Brexit and a likely trade deal between the United States (US) and China keeping the risk-tone lighter.

However, concerns over the United Kingdom’s (UK) Prime Minister’s (PM) readiness for a general election and an absence of fresh trade news seems to cap the risk sentiment during early Thursday.

ECB in the spotlight

Although no changes to the European Central Bank’s (ECB) current monetary policy is expected to roll out at the end of today’s meeting, final words of Mario Draghi as the ECB President, before Christine Lagarde takes over, will be the key for the markets. “Today’s meeting – President Draghi’s last – should be focused on the Governing Council’s thoughts on the economic and geopolitical outlook, particularly given talk about Germany falling into recession and on the unusually loud public criticism by some ECB members of restarting asset purchases. In the press conference, Draghi should be ready to fend off such questions and then hand over the reins to Christine Lagarde,” says Westpac.

The Australia and New Zealand Bank (ANZ) describes the event catalysts more in detail while saying, “The ECB’s policy meeting will be the main focus overnight, but the market doesn’t expect much action following last month’s easing package. Last month the ECB cut the deposit rate to -0.5%, extended the term lending programme, tiered reserve to mitigate costs on financial participants, and reintroduced open-ended quantitative easing of EUR20bn a month, but it is clear that the ECB is pushing up against the limits of monetary policy effectiveness. This ECB policy meeting will be the last one under the presidency of Mario Draghi, before Christine Lagarde replaces him. Draghi has been credited for preventing a break-up of the euro, but leaves behind a divided Governing Council.”

Other than the ECB, the US Durable Goods Orders, Purchasing Mangers’ Index (PMI) and New Home Sales will also offer a busy day ahead.

For the immediate direction, markets could rely on the Preliminary reading of October month Jibun Bank Manufacturing PMI, followed by August month Leading Economic Index and Coincident Index figures from Japan.

Technical Analysis

While a monthly top near 108.95, followed by 200-day Simple Moving Average (SMA) level of 109.07, limit pair’s immediate upside, August month high of 109.30 holds the key to pair’s rise towards 110.00. On the contrary, pair’s break below September-end high close to 108.15/20 can avails 21-day SMA level of 108.00 as intermediate halt before declining towards 100-day SMA level of 107.57.