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Yen to rise on BoJ’s upgraded economic outlook

The victory of Emmanuel Macron in the French election and Euro zone’s GDP growth of 0.5% in the first-quarter ensured a sharp Euro dollar rally in the past few days. On the other hand, the demand for the Yen decreased as the political uncertainty faded. That took the EUR/JPY pair to a high of 125.82 earlier this week. However, we expect the Yen to recoup losses against the Euro in the week ahead due to the underlying reasons.

The monetary policy meeting of the European Central Bank (ECB) is scheduled on June 8th . In the April meeting, ECB’s President Mario Draghi presented an upbeat assessment of the Euro zone economy. Draghi stated that the deflation risks have largely disappeared and the Euro zone is showing signs of firm economic recovery.

On this basis, the market now speculates the possibility of a reduction in the €60 billion debt purchases made every month. However, FX analysts at Lloyds bank are of the opinion that it is too early to expect such a shift and the ECB will not taper the asset purchase program until the end of this year.

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Lloyd’s further expects an announcement related to tapering only in the September meeting. Thus, it seems the market is following the adage “buy the rumor and sell the fact”.

On Wednesday, during his visit to the lower house of the Dutch Parliament, the ECB’s President Mario Draghi defended the quantitative easing program and said that it is too early to consider tapering.

While keeping the interest rates unchanged at -0.1% during the monetary policy meeting in April, the BoJ (Bank of Japan) upgraded its growth outlook. The BoJ now expects the Japanese economy to expand 1.6% in 2017, from the January forecast of 1.5%. Furthermore, the BoJ anticipates the consumer price inflation (CPI) to increase 1.4% in the fiscal 2017.

Technically, the pair has begun its downtrend after facing resistance at 125.40. The stochastic oscillator also indicates a weak momentum. Thus, a retest of the 122.40 support is highly possible.

EUR/JPY Pair: May 18th 2017

EUR/JPY Pair: May 18th 2017

A short position in the EUR/JPY pair would be ideal at this point in time. The position can be opened near 124.60 and the stop loss order can be placed above 125.40. The short position can be covered near 122.40.

In the forex market, a short position in the EUR/JPY pair can be established by investing in a put option. The strike price should be about 124.60, while the expiration date should be around May 26th .

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