The EURJPY rally has begun stalling out recently as the Euro has come under some pressure on the view that the ECB will look to ease again soon. In assessing the EURJPY technical situation at the moment, it appears the rally is intact, but we do have some signs of momentum divergence, though as yet unconfirmed. The situation will likely resolve this week or early next as we have the Bank of Japan meeting on Wednesday, and then Kuroda out speaking on Friday and the minutes of the April 26 BoJ meeting out on in the early hours on Monday. Meanwhile, the ECB meets on June 6th.
Downside for EURJPY could be a result of further signs of caution from the BoJ or Japanese government due to the fact that yields in Japanese government bonds have shown signs of distress. Meanwhile, the market may begin to price in more aggressive ECB moves if the next round of European data fails to show sufficient improvement starting with this week’s flash May PMI data out of Europe.
On the other hand, EURJPY upside would likely be the result of government bond market yields continuing to rise, no note of caution or softening of the policy stance from the BoJ this week, significantly stronger than expected May flash European PMI readings and the equity prices continuing to trend higher without any real interruption.
Chart: EURJPY
Momentum divergence on the MACD is no big surprise as it would have been a steep challenge for EURJPY to match the persistence and magnitude of the initial JPY weakening from late last year that saw EURJPY momentum peaking in late February. But we need a sell-off through the 131.15 area (marked) that holds lower and perhaps even through 130.00 to confirm that divergence and perk up the more bearish scenarios. If that comes about, we could eventually have a look at the daily Ichimoku cloud levels considerably lower below 127.00. To the upside, the pair needs a new high close to prove that the rally is still on.
SAXO BANK