Alex von Stachelkopf
Investors are looking forward to a further long-term downtrend in the markets of EUR and JPY amid an economic slowdown seen in Japan and the Eurozone while the US economy seems to be strengthening at a pretty stable rate.
Since July, the Japanese Yen has already dropped over 8% against the US Dollar. At this point, JPY is currently trading against USD around the lowest level in 6 years, which corresponds to a major high in the market of USDJPY. Meanwhile, EUR is down by 7% against USD.
Fundamental Reasons behind the Weakness
One of the major reasons why the US Dollar is still gaining value against the common European currency is the fact that the US economy is still showing signs of strength, which is confirmed by strong economic figures published recently. This is definitely going to result in the Fed raising interest rates in the near future. This step will trigger a wave of purchases of the US Dollar since the American currency and other Dollar-denominated assets are going to become more attractive for retail and institutional traders and investors seeking higher yields.
At the same time, the ECB and the Bank of Japan are expected to leave their interest rates unchanged at pretty low levels in the near future. This step will also contribute to the overall revaluation of the US Dollar as the world’s major currency. The thing is that the Japanese and European central banks are still busy stimulating their economies and therefore cannot afford to start raising interest rates yet, which is not the case with the Fed, which is about to finish tapering QE3 this month.
According to some expert investors, the reaction to the ECB’s actions may well match the central banks’ expectations. A weaker Euro helps the Eurozone economy by making the import more expensive and simultaneously triggering higher export prices as well, which helps domestic producers to boost their earnings.
Meanwhile, the Japanese GDP fell at the fastest rate since 2009 in Q2 2014. This made some investors think that the Bank of Japan will be forced to expand the current gigantic package of stimuli, which has been underway since April 2013. The news triggered another sellout of the JPY, thereby completing the period of a relative standstill, which last for almost 8 months. On top of that, the Japanese statistical agencies revealed the latest inflation figures last month. According to the reports, the current rate of inflation is just 1,1% , which is far from the inflation target set by the Japanese central bank .
According to the currency experts working for BNP Paribas, USDJPY and EURUSD are likely to reach 111.00 and 1,25 respectively.
Still, many another experts in the field assume that the strengthening of the US Dollar has already gone too far. In particular, Janet Yellen, who currently presides over the Fed, underlined that that the lending costs (interest rates) will remain low in the near future while the time of the first interest rate hike depends on the stability of the US economic recovery in the form of strong economic figures in the coming months.
According to the experts of Societe Generale, the Dollar has been performing stronger than expected, without solid fundamentals to back it. That is why many traders and investors keep on questioning the current strength of the American currency as well as its further upward potential.
Meanwhile, JPY has already lost over 36% against USD since the first calls for a weaker yen were heard in Japan 2 years ago. This questions the downward potential of the Japanese currency as well.
EURUSD and USDJPY: Mid-Term Prospects
According to the experts of Masterforex-V Academy, who conducted comprehensive research of EURUSD and USDJPY, the current situation in the markets looks as follows:
In particular, EURUSD started today’s European trading session from recovering from the local low of 1.2570, set yesterday. The recovery is taking place in advance of the forthcoming ECB meeting. The dollar bulls seem to be taking profits and going risk-averse in order to avoid unnecessary risks based on uncertainty and volatility that dominates the market in advance, during and right after such meetings. At the same time, the fundamentals show that the mid-term bias is still bearish. With that said, a further move down looks more likely, especially if the price breaks and consolidates below 1.2506.
Still, the recovery may turn out to be stronger than expected. This scenario is likely to manifest itself if the price consolidates above 1.2785 after reaching 1.2703.
As for USDJPY, the currency pair also set a new high yesterday. It was set at 109.84. This took place after the weaker-than-expected economic reports from Japan coupled with weak inflation growth in the Eurozone. Most likely, the US Dollar will manage to reach a strong level of 110.00 after breaking above 109,84. On top of that, the next upward target to watch is 111.00.
Alternatively, the Japanese Yen may temporary regain strength to make the US Dollar retrace back to 109,49 and further down to 109,18.
Alex von Stachelkopf
