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Forex_USDJPY_Eyes_Higher_High_on_Policy_Outlook-_EU_Summit_on_Tap_body_ScreenShot080.jpg, USDJPY Eyes Higher High on Policy Outlook- EU Summit on Tap

Talking Points

  • Japanese Yen: BoJ to Adjust Policy as Need, More Easing Ahead
  • Euro: EU Scales Back on Austerity, EIB to Offer EUR 100B to SMEs
  • British Pound: To Consolidate Further Ahead of Next BoE Meeting

Japanese Yen: BoJ to Adjust Policy as Need, More Easing Ahead

The Japanese Yen weakened further on Friday, with the USDJPY advancing to an overnight high of 98.12, and the low-yielding currency looks poised to give back the rebound carried over from the previous month amid the deviation in the policy outlook.

As the Bank of Japan (BoJ) moves to the sidelines, Governor Haruhiko Kuroda pledged to make policy adjustments as needed, and went onto say that the central bank will continue to pursue its easing cycle in order to achieve the 2% target for inflation.

In turn, the deviation in the policy outlook should prop up the USDJPY over the near to medium-term, and the pair looks poised to make a more meaningful run at the 104.00 handle as it carves out a higher low in June.

Euro: EU Scales Back on Austerity, EIB to Offer EUR 100B to SMEs

Indeed, the finance ministers meeting in Luxembourg failed to prop up the Euro, with the EURUSD slipping to a low of 1.3144, and the single currency may weaken further ahead of the EU Summit on June 27-28 as European policy makers preserve a reactionary approach in addressing the risks surrounding the region.

At the same time, there are reports that the European Investment Bank and the European Commissionare also working with the ECB to develop an EU strategy to alleviate the financing constraints for SMEs,’ which would include a EUR 100B lending program for small to medium-sized businesses, and we may see European policy makers continue to draw on external support as they struggle to get their house in order.

As the group of finance ministers scale back their push for austerity, we are likely to see the EU make further attempts to buy more time, and the European Central Bank (ECB) may come under increased pressure to further embark on its easing cycle as the periphery countries become increasingly reliant on monetary support.

As a result, the fundamental developments coming out of the region may continue to dampen the appeal of the single currency, and the pull back from 1.3415 may turn into a larger correction as the relative strength index on the EURUSD falls back from overbought territory. In turn, we should see the EURUSD come up against the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120 to test for interim support, but we may see a move back towards the 23.6% retracement (1.2970) as European policy makers struggle to restore investor confidence.

British Pound: To Consolidate Further Ahead of Next BoE Meeting

The British Pound pared the rebound from earlier this week, with the GBPUSD falling back to 1.5421, and we may see the sterling continue to consolidate ahead of the next Bank of England (BoE) interest rate decision on July 4 as Mark Carney takes the helm at the central bank.

Although there’s bets that Mr. Carney will implement a grow target for the BoE, it seems as though the majority of the Monetary Policy Committee will stick to the inflation-targeting frame work as the region continues to face above-target price growth, and we may see the central bank move further away from its easing cycle in the second-half of the year as it sees a slow but sustainable recovery in the U.K.

In turn, it looks as though the upward trending channel dating back to March will continue to take shape in the second-half of the year, and we may see the sterling outperform against its major counterparts as the BoE keeps its asset-purchase program capped at GBP 375.

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--- Written by David Song, Currency Analyst

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