Sell the EURJPY Rally?
On Friday the Eurozone Global Composite PMI print for July dropped to 49.4 from 51.0. This was below the minimum expectations for a print of 50. On top of this, the German PMI composite fell sharply to 48 from a minimum expected reading of 49.5.
The prospects of a coming eurozone recession continue to mount and this gives the EUR a bearish bias. This bearish bias has been compounded by the last ECB meeting.
The ECB’s last meeting
The ECB delivered a surprise 50 bps rate hike last week, but the growth concerns are more focused on the eurozone than an extra rate hike. This was particularly due to the fact that the ECB made it clear that the extra hike was to do with front-loading the hikes not raising expectations of a higher terminal rate. The ECB is facing eurozone headline inflation of 8.1% and core inflation of 3.8%. It is determined to act to get it under control which is why the hike came in at 50bps. Yet, many analysts project that the ECB will hit the brakes on hiking rates once slowing growth really bites the eurozone.
Furthermore, the announcement of the new anti-fragmentation tool (Transmission Protection Instrument) did not lift the euro as the eligibility criteria still may make it hard for some of the more vulnerable eurozone countries to qualify. Since the meeting, the BTP/Bund spread has kept rising, so fragmentation risk is still present.
EURJPY sell bias
The JPY tends to strengthen around the summer months on a seasonal basis, so there is some scope for EURJPY selling from decent levels at market. See chart below for the stop and target levels marked. However, any significant change in the outlook for either Japan’s monetary policy or the eurozone, as well as the overall risk tone, can impact this view.
HYCM clients can access the Seasonax product in order to analyse over 25,000 currency pairs, indices, commodities, as well as individual stocks. Please contact your account manager for a free trial. Certain products & services mentioned herein may or may not be available to all clients depending on which HYCM Capital Markets Group entity their trading account(s) adheres to.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.