Euro Signals Uptrend on Improvement in Business Sentiment

Euro Signals Uptrend on Improvement in Business Sentiment

The EURJPY currency pair, which was consolidating at 113 levels, fell last Friday when the IHS Markit reported a decline in the Euro zone’s flash PMI (Purchase Managers Index) reading to 52.6 in September, from 52.9 in August. The reported reading was the lowest since January 2015. The report also pointed out that slowdown in Germany was the main reason behind the decline. However, the details provided below indicate that the situation is not that bad in the Euro zone. Furthermore, the statement issued by the Bank of Japan’s governor Haruhiko Kuroda, ensures that the Yen will begin to weaken in the near future.

On Monday, the Munich-based Ifo Institute for Economic Research reported an increase in the Germany’s business climate index reading to 109.5 in September, from an upwardly revised 106.3 in the previous month. It is the highest recorded reading in the past two years and above the analysts’ estimate of 106.3. The reading indicates that the concerns of enterprises over the economic outlook have decreased considerably. Furthermore, the reading also indirectly shows that the Euro zone is shrugging off the concerns regarding the Britain’s exit from the EU.

The ECB President Mario Draghi also stated that even though the export growth remains sluggish, the Euro zone economy remains resilient to both global and political uncertainty. In a recent research report, the analysts’ at Deutsche bank has raised a query as to whether the shift in tactics by the BoJ is a lesson to the ECB. By targeting the long-term yield curve, the BoJ has principally agreed that it has almost reached the limits of increasing the monetary base. Furthermore, the rate cuts have severely affected the profitability of banks. Even the performance of insurance companies and pension funds, which are dependent on the long-term debt instruments, were severely affected. The recent move by the BoJ is expected to bring a sigh of relief to the Japanese banking sector, which is evident from the equity market rally that took place following the announcement.

Now, the Deutsche bank’s query has raised speculation of a similar move by the ECB. Even though the likelihood of a similar decision is too low, still, the speculators are already using the story to push the Euro higher. The Euro’s rise against the Yen is also fuelled by the statement from Kuroda saying that the BoJ will go to any extent to achieve the inflation rate target of 2%. Thus, we can expect the EURJPY to trend higher in the short-term, mainly due to the speculative activity.

The EURJPY currency pair has strong support at 112. The stochastic oscillator indicates that the Euro remains oversold. Thus, technically, we can expect a strong reversal in the EURJPY at any time.

EURJPY - Technical Analysis - 28th September 2016

A Forex trader can take a long position in the EURJPY pair near 112.40, with a stop loss order below 111.20. The long position can be diluted when the currency pair rises to its next resistance (minor) at 114.40.

Trading a one touch call option looks ideal at this point in time. The strike price for the call option should be about 114.30. A four week time period should be allowed for the contract to expire.

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