Euro turns weak as ECB mulls extension to QE program

The negative impact of the outcome of the Italian referendum was only short lived. The Euro covered all the losses and even gained against its rival currencies.

The Yen, which has already turned weak after the victory of the billionaire businessman in the US election, declined to a five month low of 123.18 against the Euro. However, we believe that the bounce back should be used to create short positions in the EUR/JPY pair due to the reasons listed below.

The analysts anticipate Mario Draghi to announce at least a six month extension to the quantitative easing program, which ends in March.

Poor inflation, near flat economic growth, and the UK’s departure from the EU has put the ECB in a difficult situation. To rekindle growth that will result in a meaningful wage increase, the ECB has no other option left but to extend the asset purchase program. Considering the difficulty faced in meeting the purchase target, the analysts believe that the ECB would widen the range of assets suitable for purchase. The most viable option seems to be the inclusion of bonds yielding less than the deposit rate or the bonds with less than two years maturity.

Reuters

An announcement in this regard would weaken the Euro dollar again. The Yen has weakened considerably against the US dollar and all other currencies in the past two months. Thus, it is certain that the BoJ (Bank of Japan) will not consider any additional measures to weaken the Yen. As January approaches, the Yen is expected to strengthen against the Greenback and other major currencies. The reason is that nobody has a clear idea of how Trump would perform as a policy maker. That is more than enough for the investors to book profit in the Greenback and start buying safe haven assets such as the Yen. Thus, fundamentally, it is advisable to go short in the EUR/JPY pair.

Technically, the stochastic oscillator is in the overbought region. The momentum indicator has also risen too much in a short period of time. So, we can anticipate a temporary correction in the currency pair.

A currency trader can gain from the decline by going short in the EUR/JPY pair near 122.40 levels. The currency trader can also play safe by placing a stop loss order above 123.60. The short position can be covered when the pair declines to 120.60 levels.

A binary trader can trade a low or below option to capitalize on the probable decline of the EUR/JPY pair. The trade should be taken when the exchange rate of the EUR/JPY pair is near 123.40. To improve the chances of success in the trade, the contract should remain valid for around a week’s time.

Charlie Harrison

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