Despite any fundamental and technical forces impacting the currency pairs, quite simply, it’s only a matter of time before EURUSD collapses and tests 1.29 and USDJPY breaks the key 100-level resistance.
The 1.30 level in EURUSD and 100 level in USDJPY are proving to be rock-solid support/resistance levels. While the euro is currently trading below 1.30, the selloff has been unconvincing, and the EURUSD pair has quickly magnetized back above this level on each occasion. USDJPY, on the other hand, has yet to break 100, and the high for each attempt has been lower than the one before it.
The resilience of the euro has been remarkable. Between the lower German IFO, PMI, and ZEW surveys, the European Central Bank (ECB) now has every reason to cut interest rates and could do so early as next week. The ECB also reported this morning that loan demand declined in the first quarter because of economic uncertainty, which is yet another reason why the Bank should ease.
Regardless, EURUSD has been unfazed thanks to the rise in US and European equities, expectations for Japanese purchases of European bonds, and political progress in Italy. Italian President GiorgioNapolitano has tasked Democratic Party Deputy Enrico Letta to form a new government and serve as Prime Minister. The next step is to see whether Letta will be confirmed by the divided Italian Parliament.
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We think it is only a matter of time before 1.30 finally breaks and the EURUSD sees 1.29, and that could happen before next week’s ECB meeting. Of the 35 economists surveyed by Bloomberg, 22 expect a 25-basis-point rate cut at the next meeting. This is only a small majority, but given how much Eurozone data has deteriorated, the best-case scenario for next week's ECB meeting is dovish comments from the central bank, which in and of itself is bad for the euro.
If the ECB doesn't ease in May, the Bank will at least set expectations for a rate cut in June. While there are no major Eurozone economic reports between now and the ECB meeting next Thursday, the euro could start selling off at the beginning of next week—if not sooner—on the mere expectation for more stimulus.
Simply stated, we don't think EURUSD will be able to hold 1.30 for much longer. A number of ECB policymakers will be speaking today and tomorrow, so keep an eye out for further discussions about a rate cut upcoming.
The Event that Could Push USD/JPY Past 100 This Week
Meanwhile, USDJPY is itching for a breakout, but weaker economic data continues to prevent the currency pair from doing so. US durable goods orders plunged 5.7% in the month of March after rising a downwardly revised 4.3% in February. Excluding transportation orders, durable goods fell for the second month in a row by 1.4%. While this data confirms that March was a difficult month for the US economy, a break of 100 this week won't be triggered by US data.
Instead, the main catalyst will be the Bank of Japan (BoJ) monetary policy meeting and semi-annual report on the economy. If USDJPY doesn't break 100 after tomorrow night's event risks, then it should continue to hold below this key level until next week's Federal Open Market Committee (FOMC) rate decision and non-farm payrolls (NFP) report.
By Kathy Lien of BK Asset Management