Top 5 Events - FX Week Ahead: August Eurozone Inflation Report & EUR/JPY Rate Forecast

Eurozone Inflation Report Overview:

• The August Eurozone inflation report (consumer price index) is due out on Friday, August 30 at 09:00 GMT, and the data will further underscore the ECB’s rationale to cut interest rates in September.
• Overnight index swaps are currently pricing in a 100% chance of a 10-bps rate cut at the September ECB meeting, while there is an 82% chance of 20-bps of rate cuts by the end of 2019.
• Retail traders have remained net-long since April 25 when EURJPY traded near 125.28; price has moved 6.3% lower since then.

Join us 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.

08/30 FRIDAY | 09:00 GMT | EUR EUROZONE CONSUMER PRICE INDEX (AUG A)

The preliminary August Eurozone Consumer Price Index is due on Friday, less than two weeks before European Central Bank policymakers meet for their September policy meeting. According to Bloomberg News, the headline Eurozone inflation reading is due in at 1% from 1.1% (y/y), while the core reading is due in at 1% from 0.9% (y/y).

European Central Bank Interest Rate Expectations (August 23, 2019) (Table 1)

Overnight index swaps are currently pricing in an89% chance of a 10-bps rate cut at the September ECB meeting. There is a 72% chance of a second 10-bps rate cut coming in October, while there is an 84% chance of the second 10-bps of rate cut at the December ECB meeting. Rates markets are pricing a third rate cut over the next 12-months most likely coming in March 2020.

Pairs to Watch: EURGBP, EURJPY, EURUSD

EURJPY TECHNICAL ANALYSIS: WEEKLY TIMEFRAME (2008 TO 2019) (CHART 1)

Big picture: we may be witnessing the early phases of what could be a long-term downtrend for EURJPY with the weekly timeframe suggesting a loss of triangle support from the 2012 and 2016 lows and recent swing support at the January 2019 Japanese Yen flash-crash low at 118.82.

EURJPY TECHNICAL ANALYSIS: DAILY TIMEFRAME (FEBRUARY 2017 TO AUGUST 2019) (CHART 2)

In our last EURJPY technical forecast update, it was noted that “the path of least resistance will remain to the downside…EURJPY has coiled in a symmetrical triangle since the start of August…will want to keep an eye on the EURJPY charts over the next week for a breakout opportunity.” Indeed, by market close on Friday, August 23, EURJPY had broken out of its symmetrical triangle to the downside.

Momentum indicators like daily MACD and Slow Stochastics have turned bearish anew; EURJPY prices are firmly below the daily 8-, 13-, and 21-EMA envelope. The 100% Fibonacci extension of the September 2018 high to January 2019 low to March 2019 high move comes in at 113.21, which may now be play after EURJPY spent several weeks consolidating around the 61.8% Fibonacci extension at 118.67.

In the near-term, traders will want to watch for continuation by EURJPY towards the April 2017 ow at 114.85.

IG CLIENT SENTIMENT INDEX: EURJPY PRICE FORECAST (AUGUST 23, 2019) (CHART 3)

EURJPY: Retail trader data shows 68.0% of traders are net-long with the ratio of traders long to short at 2.12 to 1. In fact, traders have remained net-long since April 25 when EURJPY traded near 125.28; price has moved 6.3% lower since then. The number of traders net-long is 2.8% lower than yesterday and 3.3% lower from last week, while the number of traders net-short is 4.9% lower than yesterday and 0.5% 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.

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

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

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