The forex currency pair of EUR/JPY will provide volatility on Friday as traders absorb the latest Japanese rate move and German economic data.
EURJPY – Daily Chart
EURJPY has been trapped between the 148 and 137.36 levels, and traders could look to play the divide between them.
The German inflation release is a final reading and may not differ too far, but it will still be worth watching. Earlier data this week showed some slight weakness in European GDP growth.
BOJ Announcement On Monetary Policy
The most important event for the pair comes ahead of the Asian session with the Bank of Japan's interest rate decision. The BOJ is widely expected to keep its ultralow rates in the last policy-setting meeting of outgoing Governor Haruhiko Kuroda.
Analysts expect the central bank's yield curve control program to remain the same, intended to support the economy with meagre borrowing costs. However, the BOJ may use the end of Kuroda's tenure to close the book on the YCC.
The BOJ currently has a short-term interest rate of minus 0.1 percent while guiding long-term interest rates to around zero percent. In December, the central bank surprised financial markets when it widened the tolerance for 10-year Japanese government bond yields to 0.5 percent from 0.25 percent.
That move sparked speculation that monetary tightening would follow. Still, Kuroda has yet to substantially change the monetary easing policy. The BOJ was happy to sit back and let other central banks take the sting out of global inflation.
According to Kuroda, inflation has been increasing due to higher import prices. The momentum is expected to slow later in the year. Traders should keep a close eye on the BOJ event as there is a slight chance that the bank could ditch the YCC before Kuroda exits, handing the new governor a blank canvas.
Hedge funds' bullish equity stance in Europe is near the highest in the past five years. Still, the appetite for stocks may fade with rising interest rates, JP Morgan said in a note to clients on Thursday.
"The potential for cyclicals to keep getting bought as much as they have lately - by hedge funds at least - also seems unlikely," JP Morgan said.
The STOXX 600 index has risen around 20% from lows hit in October. Still, it may slip on economic slowdown fears in the eurozone and global economies.
