EUR JPY in focus ahead of central bank decisions

With both the European Central Bank (ECB) and Bank of Japan (BoJ) issuing monetary policy decisions this week, the EUR/JPY currency pair will clearly be a center of focus for FX traders. In the run-up to the ECB on Thursday and BoJ on Friday, the euro has been weak against a rebounding dollar, but strong against the yen. In contrast, the yen has weakened across the board, falling for the past month against both the euro and US dollar. The Japanese yen has fallen especially quickly against the sharply rebounding dollar, boosting USD/JPY well above key previous resistance around 108.00.

As for the ECB, while the central bank is not expected to make any changes to policy or forward guidance at this week’s meeting, all eyes will again be on any indication of a concrete end to stimulus. While no major announcement on this is expected on Thursday, any hints or indications regarding this will impact the euro. One likely scenario could see ECB President Mario Draghi downplay stimulus removal and hint at a more gradual exit due to recently soft economic data. If this is indeed to be the case, the euro could be pressured.

The BoJ is also not expected to make any major policy changes, as usual, but is scheduled to release its quarterly outlook report on growth and inflation. In the past, changes to the outlook have impacted yen movement. As it currently stands, the widening differential between Fed and BoJ monetary policy have helped lead to a month-long surge for USD/JPY. This policy divergence does not currently exist to a substantial degree between the ECB and BoJ, but overall yen weakness has helped to push up the euro against the yen.

From a technical perspective, EUR/JPY is currently trading just above its key 200-day moving average and has been on the rebound for the past month after having dropped from its early-February highs throughout February and much of March. While the currency pair has been rising steadily from its late-March lows, forming a clearly ascending trendline in the process, the 50-day moving average recently crossed below the 200-day moving average, a potentially bearish indication that has not occurred since late 2015. EUR/JPY should be especially susceptible this week to what ECB President Mario Draghi says on Thursday after the central bank’s meeting. With any pronounced ECB dovishness, EUR/JPY could breakdown below the current uptrend line and 200-day moving average. With any further downside move below the 50-day moving average and the 131.50 support area, the next major downside target is around the 129.50 support area.

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