Date: 22 Oct 2018

Just when it appeared safe not to fear the next financial crisis, Italy pops up.

Precisely in what way the crisis could potentially develop is not clear. Would Italian interest rates rise, reflecting worries that the country cannot service its massive 131% of the GDP debt? Would Italian banks deteriorate since their bonds lose value? Would there be contagion effects on other countries?

Fear in the Eurozone is in the air, however, on the spotlight this month, can be that either one or both, Moody’s or S&P, will downgrade Italian debt two notches into junk territory. The potential implications of such a move, not only for Italy but also for the Eurozone, are so huge that many investors are discounting it as a possibility.

The Eurozone consumer price index (CPI) came in at 2.1% year-on-year in September as widely expected by market analyst and slightly above the 2.0% registered in August. The increase of the CPI was mainly driven by an increased energy and unprocessed food prices. The CPI is an important way to measure changes in buying trends and inflation in the Eurozone. Generally, a high reading anticipates a hawkish attitude by the European Central Bank (ECB), which will be positive for the Euro, however, a low reading is perceived as having a negative impact.

Japanese National consumer price index (CPI) fell to 1.2% year-on-year in September, comparing to the 1.3% registered in the previous month, led by lower prices of food. Nonetheless, it is the second-highest figure in the last seven months. This drop of 0.1% in the Japanese CPI may be understood as having a negative impact on the Yen.

Therefore, the increase of the Eurozone CPI and the decrease of the Japanese CPI is potentially creating a divergence between the two currencies, which may suggest a rise in the EURJPY currency pair.

Since the beginning of 2018 until last Friday close, the EURJPY remains negative with a loss of over 4.0% and since the start of October, the currency pair dropped more than 1.9%. Nonetheless, the weekly outlook ended flat with a minor loss of 0.05% and on the daily basis closed relative green with 0.8% gain, furthermore, it is in a distribution phase since mid-October.

On the last Friday session, the EURJPY began a rally straight out of the opening bell although with a narrow range but managed to close near the high of the day, however, closed within Thursday low, which suggests being slightly on the bullish side of neutral.

The stochastic, an oscillator indicator, is showing an oversold market with a reading of 18.56 which potentially indicates that the downward trend might pause for a while, however, these oscillator readings are not necessarily bullish until it breaks above the 20 level.

The EURJPY made a strong recovery in mid-August leading to the development of higher highs and higher lows all signs of a bullish trend. However, after reaching September high at 133.126 the currency pair stalled and began a downward correction that seems to have found support near 128.382. This recent bounce from support may suggest the resumption of the upward trend, although maybe caped by the confluence of the 50-day moving average and the consolidation area at 130.291.

What to expect this week: On Thursday at 11:45GMT (7:45 AM ET) the European Central Bank (ECB) should keep the interest rate unchanged in the Eurozone at 0.0% as widely expected by market analysts. In addition, ECB President Mario Draghi will hold at 13:30 GMT (9:30 AM ET) a monetary policy statement and press conference as investors seek further clues on when the central bank plans to start increasing borrowing costs. The ECB has previously assured to end its bond-buying program by 2018 end while keeping interest rates at current levels well into 2019.

 

EURJPY: Found support although Italian debt is still hovering in the air

 EUR/JPY Daily Candlestick Chart

 

Written by Hugo O’Neill, External Analyst

 

*The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades PLC (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of futures performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at its own risk.