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Why EUR/JPY May be the Most Loaded FX Pair In the Week Ahead

Why EUR/JPY May be the Most Loaded FX Pair In the Week Ahead

Talking Points:

  • The collective bullish weight of the Euro and Yen (and perhaps Pound) was enough to force a critical Dollar breakdown
  • In past weeks the Euro rallied on hawkish ECB minutes and German coalition news while the Yen surged with a BoJ technical QE change
  • Given the response to these lower level events, the BoJ and ECB rate decisions as well as Germany SPD event ahead can move markets

What is the 1Q fundamental and technical forecast for the Euro and Japanese Yen? Have the DailyFX analysts flagged Euro or Yen pairs for their top trades of 2018? Sign up for the 1Q forecast and Top Trades guides on the DailyFX Trading Guides page to find out.

EUR/JPY will very likely be the most fundamentally leveraged exchange rate through the week ahead - though it would also be a very unattractive trading vehicle for that same intensity. While there are high profile open themes simmering in the market like the US government shutdown and economist-favorite releases scheduled like the US and UK GDP readings; speculators have shown where their interests truly lay. And, as it happens, some of the clearest fundamental-to-price volatility of the year so far has been centered on the Euro and Japanese Yen. In fact, it is these two currencies (with some help from the British Pound) which muscled the US Dollar to a critical technical breakdown recently - the clearance of support on a three-year head-and-shoulders pattern - not to mention adding much of the pressure for its slide through 2017. To swamp the world's most liquid currency is no small feat.

Looking back over the past few weeks, we have noticed a key EUR/USD technical charge which resulted in the clearance of 1.2100/2200 which represented the general midpoint of the 2014-2017 range and the broader extent of the Euro's entire historical span. That was achieved by the combination of the ECB minutes two weeks ago indicating that a forward guidance change was soon at hand and later news that Germany had made progress towards making an operable coalition government. These events tapped critical themes but they weren't particularly definitive. Speculation was the champion of these developments. That said, the week ahead holds two new events that are at least equivalent to the influence of developments that earned the lift in the first place. A conference by Germany's SPD to vote on coalition negotiations can further - or disrupt - progress in this important government stabilization effort. More concentrated is the ECB rate decision on Thursday. If the central bank indeed intends to turn the tide on policy with forward guidance as the first move, we would expect to see it in the statement and remarks to follow this policy meeting.

From the Japanese Yen, a sharp advance for the currency and slide from the crosses, arose from speculation born from a technical change in the Bank of Japan's QE purchases. This looked unassuming, but against such an extreme and persistent dovish program; there is a particularly intense evaluation of anything the central bank may be planning. If this small action was indeed the prelude to what may be the most important change in global monetary policy since the introduction of the unorthodox QE programs - the most committed dove joining the effort to normalize - we would see it in the BoJ's upcoming rate decision. Where small rhetoric changes for most major central banks is generally overlooked, even a small change in language from the Japanese group would be seized upon by speculators.

Given this mix of event risk and readiness to react, EUR/JPY is clearly in a position to be one of the most volatile currency pairs for the week ahead. Yet, while it will face a potentially acute series of volatility events, it wouldn't necessarily be a favorable trade option. So many events attuned to binary outcomes can lead to unexpected swings. That said, there are other Euro and Yen crosses that would be appealing against certain outcomes. For a bullish outcome to the Euro's event risk, pairs like EUR/USD, EUR/GBP and EUR/CHF carry technical and fundamental appeal. A bearish balance would favor EUR/CAD and EUR/NZD. Among Yen crosses, a bullish BoJ result would support a bearish USD/JPY and GBP/JPY opportunity. Conversely, AUD/JPY, CAD/JPY and NZD/JPY could do well if the Japanese Yen were to tumble. We discuss the influence of top event risk and what it can generate for the Euro and Yen next week in this weekend Quick Take Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.