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EURJPY: ECB and BOJ Policy Divergence

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ECB President Christine Lagarde’s speech today at the ECB Forum was largely a rehash of what she communicated at the ECB press conference earlier this month. She said that the ECB intends to raise interest rates by 25 bps in July and there is an option to raise even more in September and move faster if the inflation outlook does not improve. A gradual but sustainable path to further rate hikes would be appropriate after September. Meanwhile, regarding fragmentation, Lagarde said the ECB would exercise its flexibility in reinvesting redemptions maturing under the PEPP and that new instruments to deal with fragmentation would allow interest rates to rise as far as needed.

Outside the forum, ECB Governing Council Member Martins Kazaks told BloombergTV today that if the central bank hikes 25 bps in July, then a 50 bps hike may be needed in September. He argued that the ECB may need to consider a 50 bps hike in July instead.

The ECB’s pledge for bigger hikes, if the inflation outlook doesn’t improve, means the interest rate differential between the EU and Japan will widen. The Yen has continued to sell after the BOJ decided not to end Yield Curve Control at its last policy setting, in contrast to all the other major banks which have turned hawkish amid high inflation around the world.

The BOJ and ECB’s policy gap is making the EURJPY pair further strengthen to the upside. EURJPY is trading at around 144.00.

Technical Overview

The EURJPY intraday bias is still inclined to the upside, with the possibility to chase higher prices. It is currently moving limited below the resistance at 144.24 and temporarily forming a triple top pattern. A move above 144.24 will continue the bullish trend with projections for FE 61.8% from a drawdown of 144.23-137.91 and 141.39 at 145.30 and in the medium term has the potential to catch up to the peak of December 2014 (149.78), if the bullish trend persists.

As long as the price holds below recent minor peaks, prospects for a correction to the downside are possible to test the 141.39 support. All indicators are still validating the price movement to the upside; currently it depends on whether the crucial minor resistance level of 144.25 is able to hold or not.

Attention has turned to the ECB’s Sintra forum. Fed’s Powell and BoE’s Bailey will speak tomorrow.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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