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React to the Reaction: ECB, BoJ Temper Tapering Concerns

React to the Reaction: ECB, BoJ Temper Tapering Concerns

2017-04-27 13:29:00
James Stanley, Currency Strategist
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Talking Points:

- The past 12 hours has brought two key Central Bank rate decisions to global markets out of Japan and Europe. Nothing much was changed and nothing much was said, but innuendo and clues are the primary market driver.

- Both Central Banks are facing varying degrees of concern around the eventual tapering of QE. Both Central Banks attempted to allay these concerns at their respective rate decisions.

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The European Central Bank held rates steady at this morning’s rate decision as widely expected, and there were no changes to the bank’s QE outlay. And this comes on the heels of a positive slate of European data points that have given the prospect of the eventual tapering of Quantitative Easing purchases. As inflation ticks-higher, as growth appears more solid and stable, markets have begun to expect that the bank will eventually scale-back their massive bond buying program, and the rate decision itself was scant on details of such a concept.

But during the accompanying press conference, the head of the ECB, Mr. Mario Draghi, committed to keeping QE online as long as inflation remained below the ECB’s 2% target. Mr. Draghi said directly that there have been no discussions on exit strategy.

Given the Euro’s recent bump of strength, one might imagine that a re-commitment to continued QE would take some life out of the single currency. We did see a quick re-check of resistance at 1.0933 just before the press conference began, which would indicate that at least some traders were positioning for a hawkish tilt in Mr. Draghi’s comments. This level is the 61.8% Fibonacci retracement of EUR/USD’s 2017 move, and had helped to cauterize the highs from EUR/USD’s recent bullish move.

React to the Reaction: ECB, BoJ Temper Tapering Concerns

Chart prepared by James Stanley

Where this move could become usable in EUR/USD revolves around whether or not we see another support-check at or around 1.0820. This is the 50% retracement of the same 2017 major-move mentioned above, and this level has given quite a few interesting price action inflections over the past few months. If support should show-up here, this could open the door to bullish continuation strategies in EUR/USD.

React to the Reaction: ECB, BoJ Temper Tapering Concerns

Chart prepared by James Stanley

Where this reaction in the Euro could be a bit more usable at the moment is against the Japanese Yen. The Bank of Japan also held a rate decision this morning, and if you’d like to read more about that please look below. The big takeaway is that the BoJ is also not yet ready to begin discussing exit strategies while remaining committed to their ‘emergency like’ monetary stimulus.

Where this becomes usable is taken from the potential for monetary divergence between the ECB and BoJ. While the ECB committed to QE efforts at this morning’s meeting, the BoJ can arguably stay on QE for even-longer and, reasonably speaking, probably will remain dovish beyond the expiration of the ECB’s bond buying program.

If choosing to go short a currency to couple with Euro strength, investors may have a preference for shorting the Yen as opposed to a U.S. Dollar that’s likely going to face considerable volatility in the coming months around the prospect of rate normalization and fiscal policy modifications.

We discussed the technical setup in EUR/JPY yesterday; and on the chart below, we’re looking at the updated setup.

React to the Reaction: ECB, BoJ Temper Tapering Concerns

Chart prepared by James Stanley

BoJ Cuts Forecasts, Keeps Stimulus Unchanged

In the overnight session we heard from the Bank of Japan for their April rate decision. As widely expected, the bank kept stimulus efforts unchanged as they continue to try to march the Japanese economy back towards their 2% inflation target. We did see one change on the front of inflation expectations, as the BoJ slightly-lowered inflation forecasts for the fiscal year beginning this month to 1.4% from the previous 1.5%.

The direct impact on the Yen was rather muted, but given that Yen weakness held after a rather steep sell-off over the past week-and-a-half could be deductively bearish for the currency; primarily taken from the fact that the BoJ did little to stoke fears of tapering QE or tightening policy at any point in the near-future.

In yesterday’s article we looked at USD/JPY with a series of potential support levels in the effort of plotting top-side re-entry. The bigger picture goal would be to see a resumption of the initial trend that developed around the U.S. Presidential election, which provided a little over a month’s worth of strong gains to USD/JPY. But since the 2017 open, price action in USD/JPY has been retracing a chunk of that election-inspired move. But after re-visiting the bottom of this channel last Monday, price action in USD/JPY has begun to take on a bullish tone, and we’ve now moved into a big zone of potential resistance.

React to the Reaction: ECB, BoJ Temper Tapering Concerns

Chart prepared by James Stanley

Shorter-term price action in USD/JPY around last night’s BoJ decision has remained rather bullish. We did get a support check near the close of U.S. trading yesterday, with prices bouncing just above the ‘s1’ zone of support that we were watching. Given that this move has remained rather stretched, and also given that we’ve just run-into a huge zone of potential resistance between ¥111.61-¥112.40, traders would likely want a bit more information before trading the move higher. Another support test could open the door to bullish positions, as could a top-side break followed by a support check at a prior resistance level (such as ¥111.61).

React to the Reaction: ECB, BoJ Temper Tapering Concerns

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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