EUR/JPY forecast: Japanese yen roars as global yields dip

Following the release of the slightly weaker US inflation data earlier, markets brought forward their rate-cut expectations from the Fed back to July from the end of the year. And that caused all sorts of moves in the markets: stocks roared, the dollar dropped, and bond yields plunged. It wasn’t just the US yields that dropped, but they fell across Europe too. But Japan’s yields, which hit fresh multi-year high overnight, remained in the positive. That made the Japanese yen the strongest currency. With the gap between yields in Japan and the rest of the world narrowing, all major JPY pairs fell, including the EUR/JPY as the yen rallied. The EUR/JPY forecast remains bearish.

US inflation data was slightly softer, causing yields to tumble

In case you missed it, US core CPI eased to 3.2% y/y in December and that was a tick lower than expected, while the headline was in line with expectations at 2.9% y/y. That was enough to cause bonds to rally and yields to drop.

But the yen was already on the rise even before the inflation data came out. The renewed strength in the yen came on the back of hawkish BoJ’s Ueda remarks. The BoJ Governor reiterated the central bank's commitment to raising borrowing costs if the economy continues to improve. Ueda added that he wants to discuss and decide whether to raise rates at next week's policy meeting. Comments from Finance Minister Kato, who revived concerns about potential government intervention in the FX markets, also supported the yen.

EUR/JPY forecast: Bond markets continue to drive the yen

It is the bond markets where investors’ attention remains firmly fixated on. Bond yields have been surging higher in recent days across the world, all due to rising expectations that interest rate are likely to remain tight for longer, mainly in the US, but European rate expectations have also been repriced higher somewhat - most notably in the UK. In Japan, investors are growing confident that the Bank of Japan is going to start lifting rates further from their ultra-low levels and bring monetary policy a little closer to the rest of the world.

In the last couple of days, though, we have seen a bit of a pullback in those expectations thanks to release of weaker-than-expected inflation data this week from both the US (PPI and CPI) and UK.

However, the BoJ governor’s hawkish comments have caused further tightening in the still-large gap between yields in Japan and the rest of the world. For that reason, the yen has been the strongest performer so far in today’s session. Whether or not the yield spread between the US and Japan will widen again will now partly depend on incoming US data.

Beyond data and oil prices, it is Trump’s threat of tariffs that is the main driver behind rising inflationary expectations. So far, his rhetoric has not softened, through reports suggest he may apply tariffs more gradually to help limit inflation.

EUR/JPY technical analysis and key levels to watch

Source: TradingView.com

The EUR/JPY has been creating a few lower highs ever since it topped out in July of last year at above 175.00. More recently in October, it topped out at just under the 167.00 handle and moved back below the 200-day average. It has since had a few attempts to climb back above the 200-day MA but wasn’t successful. Consequently, rates have broken down a few key support levels, which have now tuned into resistance – including 162.85.

Support that should have held today at 161.80 – the high of Monday’s hammer candle – has failed. This level is now the most important short-term resistance to watch.

The next potential support comes in around 161.00 and then there’s nothing obvious until the psychologically important 160.00 handle.

Could we see the EUR/JPY dip towards the support trend around 158.00 area in the coming days?

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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