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EUR/JPY trades below 130 after German elections

German elections undermined the euro, but the Bank of Japan did its job and sent the JPY lower, causing the EUR/JPY cross to be stuck in a tight range.

The EUR/JPY cross showed little desire for volatility on Monday and remained pinned to the 130 level as the euro declined after the German elections, but the Yen also dropped following Kuroda’s speech.

Negative outlook in Japan

Earlier in the day, the Bank of Japan (BOJ) Governor Haruhiko Kuroda said that the economic recovery would become clearer as the impact of the pandemic subsides . Additionally, he noted that Japan’s economy remains in a severe state but picking up as a trend.

On monetary policy, Kuroda reiterated that the BOJ wouldn’t hesitate to take additional easing steps if needed . Lastly, the central bank must continue focusing on pandemic response as economic uncertainty remains high.

A rather negative speech (economic uncertainty combined with COVID restrictions & dovish monetary policy) sent the USD/JPY to three-month highs near 111. Still, the EUR/JPY cross remained flat due to the EUR/USD weakness.

More JPY volatility could come during the Asian session on Tuesday. The Bank of Japan will release the minutes from its latest monetary policy decision , which sounded relatively dovish and undermined the Yen.

German elections in focus

Sunday’s German elections brought a little surprise as the center-left Social Democratic Party won with 26% of the votes, according to the preliminary results, two percentage points ahead of the center-right Christian Democratic bloc. As such, the party of the retiring Angela Merkel will likely go into opposition for the first time in 16 years.

The single currency dropped broadly after the results, dragging the EUR/USD pair below the 1.17 level. However, the dip seems to be bought, and the euro can’t maintain an evident bearish momentum.

The wafer-thin margin of victory for the SPD creates even more uncertainty over the likely formation of the next government and leaves an array of potential coalition options still on the table. Coalitions talks are expected to take weeks and possibly months. The continued uncertainty is one reason why there has been limited euro reaction to the initial election results, Strategists at MUFG Bank commented on the results.

As of importance today will be ECB President Christine Lagarde’s testimony before the Committee on Economic and Monetary Affairs . Her speech might impact the shared currency.

Additionally, US durable goods orders for August will be released, expected to improve notably to 0.7% from -0.1% previously . However, core durable goods are forecast to weaken slightly, from 0.8% to 0.5%.

Considering those numbers are the only major economic news on the agenda today, we might see some volatility in the financial markets.

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