The EURJPY currency pair is currently navigating a compelling narrative shaped by divergent monetary policies in the Euro Area and Japan.
While the Bank of Japan (BoJ) opts to maintain its ultra-loose monetary policy with -0.1% interest rates, Euro Area policymakers are grappling with surging inflation, emphasizing a reluctance to cut interest rates immediately. This shift is underscored by December’s Euro Area inflation, spiking to 2.9% after seven consecutive months of decline, potentially reinforcing the narrative of higher rates for a more extended period.
The contrasting approaches between Japan and the Euro Area have significantly influenced the EURJPY currency pair, driving an 11% ascent in 2023, marking four consecutive years of gains. As the EURJPY pair currently trades 3.35% higher year-to-date, the impending European Central Bank interest rate decision on Thursday adds a layer of anticipation, with the market expecting rates to remain unchanged at 4.5%.
Technical
The EURJPY currency pair has recently embarked on an impressive three-week winning streak, staging a remarkable recovery following a fourth-quarter downturn in 2023.
The rally originated from the 153.115 level, where oversold RSI conditions paved the way for the upward surge. However, the ascent encounters a potential hurdle at the 163.650 resistance level, stemming from the third-quarter 2023 selloff amid overbought RSI conditions.
The pair currently navigates a consolidation within a rectangle pattern, following a crossover above the 61.80% Fibonacci Retracement Golden Ratio. The volume decline during this phase suggests a temporary equilibrium between buyers and sellers, awaiting a breakout. A high-volume breakout could trigger a sustained move, with the 163.650 resistance potentially serving as an upside target. Conversely, a breakdown might test the Golden Ratio if bearish pressures prevail.
Summary
The EURJPY currency pair, buoyed by divergent monetary policies and Euro Area inflation resilience, marks an 11% ascent in 2023. Currently on a three-week winning streak, it faces a crucial juncture amid a sideways consolidation. Traders keenly await the European Central Bank decision, anticipating stability in rates at 4.5%, adding an intriguing layer to this dynamic narrative.
Sources: Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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