EUR/JPY Poised for Near-Term Pullback as Technical Divergence Takes Shape
EUR/JPY has been an excellent buy for long term traders who expect a long-term appreciation of the currency. However, with market momentum in the opposite direction, EUR/JPY is now poised for a near-term pullback as technical divergence takes shape in the U.S. dollar-JPY trade.
The Japanese currency is in a tailspin on a number of fronts: it is on a losing streak against the Euro, its official exchange rate is negative and its yield spread is negative. Meanwhile, Europe’s Central Bank has cut interest rates to record lows and signaled that it will tighten its monetary policy even further. The central bank has also purchased trillions of euros to shore up the euro and stop the bleeding. All this has made European banks reluctant to lend money to the Japanese and pushed the yen’s value down.
What exactly is the basis for these concerns? First, it is not clear whether the Japanese economy can sustain a double dip recession or a major economic implosion. Second, while the government is attempting to stimulate the economy by printing money, this seems like a short-term fix for Japan’s problems and is unlikely to create long-term stability.
As for the European Union (EU) and its governments, there is a growing concern that the European Central Bank will use its power of quantitative easing to keep the currency strong and in a state of high inflation, which would further weaken the euro and push it closer to deflation. This is a problem that is likely to persist for the next several years, so it is worth looking out for signs that the European Central Bank is about to tighten its monetary policy in response to recent declines in the euro.
In the long term, the best strategy may be to focus on buying when price action is bearish and sell when price action is bullish. One approach that makes sense when EUR/JPY is trending up is to purchase in areas where it has already declined. For example, if you have purchased a EUR/JPY of 10 EUR and it has fallen back below that level, then it is likely that the EUR will soon decline again, possibly to a single figure. Then, you could either sell when the price is under 10 EUR or wait for it to rebound and double in value.
Meanwhile, you should monitor the developments on the sidelines and play the short term on EUR/JPY, using a EUR/JPY strategy that focuses on a lower target such as the EUR/USD and a EUR/JPY strategy that trade at a single level. for an extended period. If the price action is bearish, make your entry and exit. If the price action is bullish, then follow through and trade higher.
If you are planning to invest in the European stock markets, you should stay on top of the developments in the EU and the European government’s policies as they affect the exchange rate. A strong exchange rate helps to increase liquidity in the market, which is conducive to making profitable long-term investment decisions.
The European Central Bank’s (ECB) balance sheet shows how much money it is currently printing and the rate of interest it charges to banks for loans. To keep EUR/JPY on a good course, the Bank of Germany (BOG) is likely to keep interest rates low for a prolonged period of time, thus encouraging more bank loans and credit. Another negative economic indicator is a drop in industrial output growth, which is likely to have an adverse impact on the cost of the euro as a whole.
Meanwhile, the European government’s stance towards Greece has been supportive of the country’s banks, as it has encouraged them to lend more money to businesses and citizens in an effort to prevent bankruptcy and facilitate debt repayment. In addition, it has encouraged creditors to provide a larger amount of support to businesses in order to avoid default. A key positive development was the announcement of an agreement between the European Commission and the European Central Bank (ECB) to extend the current concessions for financial assistance to Greek citizens by three years.
It remains to be seen whether the European Central Bank will use its powers of quantitative easing to help the banking sector. With so many negative signals coming from the Greek financial sector, the Bank of Germany may well take some time before taking any drastic action, but in the longer term, it is possible that the ECB will use its interventionist powers to ensure that the economy in Europe is able to recover and return to normal.
However, it is important to be aware of risks that are being imposed by the European government’s intervention, as it has a direct effect on the exchange rate and the performance of the EUR. If the European government begins to tighten its purse strings and tries to force banks to provide large amounts of support to the banks, then it is very likely that the EUR would soon decline against other currencies.