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Top 5 FX Events: March German CPI & EUR/JPY Price Outlook

Top 5 FX Events: March German CPI & EUR/JPY Price Outlook

2019-03-28 12:15:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- The preliminary March German Consumer Price Index will be released on Thursday, March 28 at 13:00 GMT.

- According to Bloomberg News, consensus forecasts are calling for German inflation to come it at 0.6% m/m and 1.5% y/y.

- Retail traders are net-short EURJPY and recent changes in positioning suggest a bearish bias.

Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

03/28 THURSDAY | 13:00 GMT | EUR GERMAN CONSUMER PRICE INDEX (MAR P)

As continent’s largest economy, as the Germany economy goes, so too does the Eurozone. That rule of thumb extends beyond topline growth rates to inflation readings as well. Energy prices have been stable for the past month (Brent Oil -0.1% past month), and the trade-weighted Euro (-4.2% since March 22, 2018) has proved soft.

Coupled with the fact that the European Central Bank has recently announced that it will renew its TLTRO program later this year, there may be the near-term conditions for the decline in inflation readings to level off. The upcoming preliminary German Consumer Price Index on Thursdaymay confirm this theory, where headline CPI is due in at 0.6% from 0.4% (m/m), and 1.5% (y/y) (unchanged from the final February reading).

brent oil vs 5y5y inflation swap forwards, eurozone inflation expectations

It appears that sliding Eurozone inflation expectations have less to do with inputs to inflationary pressures – like changes in energy prices – and more to do with the perception of the global economy in the wake of the March Fed meeting. The FOMC’s dramatic departure from its stance of just a few months ago suggests that serious concern is building over the global macro environment as the US-China trade war rages on, the latest Brexit developments have led nowhere, and the growing prospect that Q1’19 US GDP comes in below 1% - right as growth rates in Asia and Europe stall.

Pairs to Watch: EURGBP, EURJPY, EURUSD

EURJPY Price Chart: Daily Timeframe (July 2018 to March 2019)

eurjpy price chart

EURJPY has been trading on a slight incline since the Yen flash-crash at the start of the year, but some technical developments in recent weeks may be hinting at what has yet to come. The 61.8% retracement at 127.67, of the 2018 high to the 2019 low range, was never retaken during the rebound since the Yen flash-crash. Technicians often use the 61.8% retracement as the delineating factor between describing price action as a “rebound” or as that of a “new trend.”

Considering that 127.67 was never retaken during early-March, price action since then has been suggesting that a new bull trend has not formed. Instead, with EURJPY closing back below the 38.2% retracement (124.29) this week at 124.21, it would appear that the probability of more downside has increased materially.

IG Client Sentiment Index: EURJPY (March 22, 2019)

ig client sentiment index, eurjpy price chart

Retail trader data shows 66.7% of traders are net-long with the ratio of traders long to short at 2.0 to 1. The number of traders net-long is 67.2% higher than yesterday and 47.0% higher from last week, while the number of traders net-short is 49.5% lower than yesterday and 50.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURJPY-bearish contrarian trading bias.

Read more: Top 5 FX Events: Final Q4’18 US GDP & USDJPY Price Outlook

This note was originally published on March 22, 2019.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX

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