EUR / JPY, ECB, Average Inflation Targeting, Deflation Fears – Talking Points:
- A trend of risk was seen across Asia-Pacific trade as investors applauded progress in the US budget support negotiations.
- The potential adoption by the European Central Bank of an average inflation target (ACI) could weigh on euro.
- EUR / JPY rates rebounding from multi-month lows may run out of steam as prices struggle to break through key resistance.
Stock markets advanced during Asia-Pacific trading as investors applauded signs of progress in congressional stimulus negotiations.
Looking ahead, a large number of manufacturing PMI figures in Europe could prove to be a market move ahead of the first US jobless claims data for the week ending September 26.
Market reaction table created using TradingView
Adjusting the ECB’s inflation target could weigh on the euro
Upcoming inflation data in Europe could put further pressure on the European Central Bank to do more to support the emerging economic recovery of the trading bloc, as consumer prices have fallen on an annual basis for the first time since May 2016 and the annual core inflation rate falling to a record low of 0.4% in August.
In fact, it looks like the ECB may reflect the Federal Reserve’s recent adjustment to its 2% mandatory target and adopt a flexible form of average inflation targeting (AIT), as President Christine Lagarde said that “the broader discussion today is whether central banks should commit to explicitly compensating for inflation hiccups when they have spent some time below their inflation targets ”in a speech scheduled for September 30.
Lagarde added that if the AIT proves to be a credible strategy, it could serve to “strengthen the capacity of monetary policy to stabilize the economy against the lower bound as the promise of an inflation exceedance increases. inflation expectations and therefore lowers real interest rates ”.
Euro area core inflation rate (1997-present)
Therefore, with an annual inflation rate in the euro area averaging a paltry 1.2% over the past 12 years and a “second waveCovid-19 infections threatening to force reimposition of economically devastating restrictions, expansion of €1.35 The Pandemic Emergency Purchase Program (PEPP) could be on the table by the end of the year.
However, the suggestion by some committee members that “the flexibility of the pandemic emergency purchasing program suggested that the net purchase envelope should consider a ceiling Rather than a target“, indicates that the central bank may not have a unanimous opinion on the way forward for its monetary policy response.
Nonetheless, disappointing economic data and a deterioration in health outcomes could force the ECB to take the lead, with the provision of further monetary stimulus likely weighing on the euro in the near term.
EUR / JPY Daily Chart – Stifling buying pressure of 21 DMA
As noted in previous reports, EUR / JPY rates have significantly reduced since breaking below Rising Wedge support and August 6 high (125.59), price falling more than 3.5% since setting post-crisis high on September 1 (127.07 ).
However, with the price constructively perched above the 100-day moving average (122.97) and the RSI attempting to break above its neutral midpoint, a further test of the annual high (126.85 ) is hardly out of the question.
Additionally, a bullish cross on the MACD indicator may encourage potential buyers and ultimately signal a resumption of the primary uptrend, if the EUR / JPY can successfully block confluent resistance at the June high (124, 43) and the downtrend extending from the 2020 high (126.85). ).
Conversely, a daily close below the 124.00 level could induce a more sustained pullback and highlight support at the September low (122.38).
EUR / JPY daily chart created using TradingView
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– Written by Daniel Moss, Analyst for DailyFX
Follow me on twitter @DanielGMoss
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