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EUR/JPY falls ahead of ECB meeting

The Bank of Japan sounded dovish (as expected). Will the ECB surprise later in the day?

The EUR/JPY cross was trading 0.3% weaker during the Frankfurt session on Thursday as traders digested the Bank of Japan monetary policy meeting, with the European Central Bank policy decision due later in the day.

From minor macro news, the German unemployment rate slightly improved to 5.4% in October , while the unemployment change decreased further to -39,000 (which is positive), from -30,000 previously.

Consumer confidence in the eurozone continues to decline and printed -4.8 for October , down from -4 in September. On the other hand, the economic sentiment indicator rose marginally to 118.6, from 117.8 scored in the previous month.

Dovish Bank of Japan

Earlier in the day, the Bank of Japan left monetary policy unchanged, as widely expected.

The central bank’s Governor Haruhiko Kuroda reiterated that the central bank would ease policy further without hesitation as needed . He also said that the BoJ needs to pay attention to the impact of coronavirus on domestic and overseas economies.

Furthermore, Kuroda does not think that US tapering has a direct impact on interest rates, currencies. The central bank also said that domestic inflation would not reach elevated levels as elsewhere in the world.

Finally, the Bank of Japan upgraded its long-term growth forecast for 2022 to 2.9% from the previous estimate of 2.7% but downgraded its 2021 outlook from 3.8% to 3.4%.

ECB also dovish?

Later in the day, the European Central Bank decides about monetary policy. The primary interest rate will stay unchanged at 0.0%. However, the following statement will be of major importance, considering the soaring inflation in the eurozone. The EURUSD pair was seen at around 1.16, heading into the decision.

They will clearly articulate they have confidence in the recovery, but will also note they see little need to raise rates to end-2023 given inflation. The medium-term rates outlook for the ECB is at odds with both the US FOMC and UK’s BoE, analysts at Westpac said on Thursday.

Elsewhere, the 5yr5yr Euro inflation swaps hit 2% for the first time on Friday, so it appears the market believes the ECB has achieved long-term success in hitting its inflation mandate.

Traders will also pay attention to the US GDP data for the third quarter. The annual change is forecast to decline notably to 2.7%, down from 6.7% previously. The GDP price index will likely decrease to 5.4%. Additionally, the usual Thursday’s jobless claims are due.

As long as the EUR/JPY cross trades above the significant support zone of 130.40 – 130.70 , the medium-term outlook should remain bullish, targeting the current cycle highs at around 134.00.

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