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Why the ECB could trigger volatility in the USD/JPY on Thursday

September 11, 2019 09:30

Source: Economic Events September 11, 2019 - Admiral Markets' Forex Calendar

Even though the economic calendar is thin on Wednesday and volatility in Equities and FX markets subdued with awaiting the ECB rate decision on Thursday, one can clearly feel tensions among market participants – also in, at first glance, "ECB-uncorrelated" currency pairs like the USD/JPY.

After the NFPs Into the last weekly close came in mixed (130k vs 160k expected, but Average Hourly Earnings (MoM) were 0.4% against 0.3%), the USD/JPY bulls held the currency pair next to the crucial region around 106.80/107.

If the attempt to recapture 107.00 is sustainable, a further stint up to 108.50/109.00 is an option, especially if speculation of a favourable trade deal between the US and China for both sides start to manifest over the next days and weeks.

But now our thinking: not only that any new "Twitter escalation" from US president Trump ala "Sure, we aim on a favourable deal – for the US! China will pay!" could dampen the hopes and speculation that the US and China will agree on a deal and likely see a sharper drop from the current levels, identifying the current run above 107 a fake-out.

We should also remember that the very expansive monetary policy of the ECB and negative yield developments in European, especially German, bonds, have been a topic in Trump's tweets several times over the last few weeks.

That said, a very dovish ECB on Thursday could realistically result in a new tirade from Trump, also bringing up speculation of an outright US currency market intervention or US Secretary of the Treasury Mnuchin saying something like "The US has no longer a strong US dollar policy".

Both cases would be very bearish for the US-Dollar and push the USD/JPY sharply lower.

Here a drop below 105.80 could trigger here a wave of further selling and quickly activate the region around 105.00 again:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between June 12, 2018, to September 10, 2019). Accessed: September 10, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of USDJPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.

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