Euro Finds Buyers Ahead of the ECB Meeting

A new trading week has just started, and the name of the game in the FX market is the JPY weakness. Since the Bank of Japan said in March that it would buy unlimited amounts of JGBs, the JPY pairs have gone through the roof.

Perhaps the most impressive rally is the one observed in the EUR/JPY cross. After initially dropping to 124 when the Russia-Ukraine war started, the cross reversed course dramatically and now trades close to 137, having gone up by almost 1,300 pips higher in about a month.

But the EUR/JPY cross is not the only EUR pair that has found support at lower levels. Even the EUR/USD has, despite the fact that the Federal Reserve of the US is already raising rates, while the ECB does not plan to do so anytime soon.

EUR/USD Still Bearish While Below the Pivotal Level

EUR/USD has been selling aggressively this year. First, there was the increased divergence between the Federal Reserve and the ECB. As traders saw the Fed become more vocal regarding the new tightening cycle, the ECB is only moderately hawkish.

Secondly, the war in Ukraine triggered a selloff as investors preferred not to take any risk and avoid the common currency. As such, the EUR/USD dropped below 1.12, a pivotal level for the pair.

In other words, despite a possible double bottom pattern, the EUR/USD remains bearish while below 1.12. A close above 1.12, however, would turn the bias bullish as investors would try for the measured move seen at 1.16.

ECB Meeting Looms Large

On Thursday, the ECB presents its monetary policy for the period ahead. The central bank faces a difficult task.

On the one hand, inflation runs way above the ECB’s tolerance level. As such, the central bank has issued some hawkish statements, and the market now anticipates that the deposit rate will be lifted from the current level this year.

On the other hand, the war in Ukraine calls for caution in tightening the monetary policy. Inflation is triggered by the supply side, and hiking rates will not help. Instead, hiking rates might trigger an economic recession.

All in all, this week, we will find out more about the ECB’s plans. One thing is sure – the common currency is being bought on every move lower so far.