There is continued talk in Forex circles this week that the European Central Bank will send a “dovish” message at this weeks policy meeting – suggesting that further monetary easing is likely on its way. The recent strengths in EUR hurts exports, and some feel a rate cut could come as early as this meeting scheduled for Thursday.
As we’ve discussed here on my occasions, the current “currency war” has countries racing for the bottom, with hopes of making their export prices look more attractive to foreign buyers. If your buyer can stretch his money further and possibly get a better deal buying from you ( as your currency value is reduced ) – you sell more airplanes, you’re country’s economy grows etc…
At least that’s the idea anyway.
Lining this up with some crazy technical conditions I present to you the chart of EUR/JPY – or the Euro vs Yen. On purpose I’ve added every single technical indicator / explanation as to further drive the point home, as this “should” be a whopper. The chart is a day or two old and has already moved a couple hundred pips lower.
Forex_Kong_EUR_JPY_2013-10-30
It was the BOJ’s massive liquidity that drove this pairs huge move over the past year, and now we’ll see The European Central Bank “fight back” with more talk and a possible rate cut to tip the scales back in their favor.
On nearly every technical level known to man ( and now with increasingly likely fundamental factors ) this thing is about as overbought as it gets, as this again is a “weekly chart”.
Continued USD strength coupled with a move by the ECB could have this thing fall hard – making for a fantastic short opportunity moving into Thursday’s meeting.
The Currency War Intensifies: Trading the ECB’s Next Move
Why Central Bank Intervention Creates Monster Trading Opportunities
When central banks telegraph their intentions this clearly, smart traders position themselves ahead of the crowd. The ECB’s dovish stance isn’t just talk – it’s a direct response to the Federal Reserve’s tapering hints and the Bank of Japan’s relentless money printing that’s been crushing EUR/JPY for months. This creates a perfect storm where technical analysis aligns with fundamental drivers, giving us multiple confirmation signals for a high-probability trade setup.
The beauty of central bank intervention trades lies in their sustainability. Unlike retail-driven moves that fizzle out in hours, policy-driven currency shifts can last weeks or months. When the ECB cuts rates or expands their asset purchase programs, they’re not just moving markets temporarily – they’re fundamentally altering the interest rate differential that drives carry trades and institutional money flows. EUR/JPY has been the poster child for this dynamic, riding the wave of Japanese quantitative easing while European monetary policy remained relatively tight.
Reading Between the Lines: ECB Forward Guidance Decoded
The ECB’s communication strategy has evolved dramatically since Mario Draghi’s “whatever it takes” moment. Now they’re using forward guidance as a weapon, preparing markets for policy shifts weeks in advance. This week’s meeting isn’t just about whether they cut rates – it’s about setting expectations for the next six months of European monetary policy. Smart money is already positioning for a more aggressive ECB stance, which explains why EUR/JPY started declining before any official announcement.
Pay attention to the language surrounding inflation expectations and growth forecasts. If Draghi mentions concerns about disinflation or references the strong euro’s impact on competitiveness, that’s your green light for aggressive short positioning. The ECB has learned from the Fed’s communication playbook – they’ll signal policy changes well before implementing them, giving traders who can read the tea leaves a significant edge.
Cross-Currency Dynamics: The USD Factor
Here’s where this trade gets really interesting – USD strength amplifies the EUR/JPY decline through cross-currency mechanics. As the dollar rallies against both the euro and yen, it creates additional downward pressure on EUR/JPY that goes beyond simple bilateral dynamics. This triple-whammy effect – ECB dovishness, continued BOJ easing, and USD strength – creates the kind of multi-directional pressure that generates those 500-pip moves traders dream about.
Watch EUR/USD and USD/JPY closely as secondary confirmation signals. If EUR/USD breaks below key support levels while USD/JPY holds gains, it confirms that dollar strength is the dominant theme. This scenario actually strengthens the EUR/JPY short thesis because it means we’re riding both European weakness AND dollar strength simultaneously. The mathematical relationship between these pairs creates a multiplier effect that can accelerate EUR/JPY declines beyond what either individual move would suggest.
Risk Management and Entry Strategy
With technical and fundamental stars aligning this perfectly, position sizing becomes critical. This isn’t the time for tentative half-positions – when you get confluence this strong, you need to size appropriately to capitalize on the opportunity. However, central bank meetings can create short-term volatility that stops out even correct directional bets, so consider entering in stages or using options strategies to limit downside while maintaining upside potential.
The key levels to watch are the previous weekly lows and the 61.8% Fibonacci retracement from the major move higher. A break below these levels with volume confirmation signals that institutional money is finally rotating out of this overextended position. Set your stops above recent highs but give the trade room to breathe – central bank-driven moves often retest key levels before accelerating in the intended direction.
Thursday’s ECB meeting represents more than just another policy announcement – it’s a potential inflection point in the ongoing currency war between major economies. The combination of overbought technicals, shifting central bank policies, and evolving global monetary dynamics creates exactly the type of high-conviction setup that separates profitable traders from the pack. When fundamentals and technicals align this clearly, the market rarely disappoints those positioned correctly.
Amazing setup! Thanks for sharing this idea. Anyway, I hope that the ECB will cut their rates and bring us back a strong yen.
This sucker ( as well as GBP/JPY looking very similar ) will absolutely “roll” on a rate cut out of ECB on Thursday.
Even without – this has been on my radar for some time now – and is in “nosebleed” territory looking for correction. With the recent banter about “deflation in EU Zone etc…” – I’m putting 2 and 2 together here as that’s what I like.
When the technicals AND the fundamentals align – Boom! Big trades!
Currently EUR/JPY is at 133.31 and i think first tis gonna go a little up like 100pips and then come down if there is a rate cut like you said , but most of the people are saying that there will be no rate cut as this will show that there was no euro zone recovery as ECB was saying , and all were lies and i dont think that ECB would want that , so see them selves called liers , this is what i think , what do you say kong ?
P.S: i hope i am wrong cos i have a sell order running on eurojpy
Goodness.. another no vol ramp up on the s&p. Looks like it is going to break 1800 soon with them working off the overbought conditions.
I read this today on Josh Brown’s blog. If you believe we are at a major market top, you may be right, but just known that you’re in the “this time is different” crowd. How often are those guys right?
“According to the nation’s largest asset manager, BlackRock, with some $4 trillion in assets, a majority of people are not reveling in the all-time highs we’re seeing stocks. In fact, a great many of them are ignoring it entirely.
Despite steady gains in recent years that have pushed some stock markets to all-time highs, most people are not comfortable taking on more risks to achieve better returns, according to the global survey — one of the largest ever, spanning 17,567 investors including 4,000 Americans, across a range of income levels…
While affluent investors (those with more than $250,000 in investable assets) expressed greater confidence about their financial futures, even they – along with investors of all types around the world — tend to hold a lot of cash, with no immediate plans to change their investment mix. In the U.S., investors of all types held 48% of investable assets in cash, with 18% in stocks and 7% in bonds.
48% cash, 7% bonds, 18% stocks.
I should tell you that during the late 1990’s, stocks and stock mutual funds were 40% of US household net worth, according to data from the Federal Reserve – more than double the current totals. The 18% number we see today is actually closer to the 16.5% number registered at the bottom of the secular bear market in 1982.”
Hi Andrew.
Great input/ info etc….just not sure how you are interpreting it.
Are you suggesting that there’s “still a large % of people on the sidelines, that they will still “enter” and stocks continue to rise on that ?
Or……the stark reality that this entire rally / pump job is computers / banks and the Fed and that indeed “no one is participating”?
Just suggesting that historically major tops happen when everyone’s in, and everyone’s NOT in. There’s still a lot of “potential” buyer’s out there — i.e., the retail bag holders. Certainly, the monetary “experiment” going on is a bit different, but is the market going to top before the retail investors pile into stocks? I’m not sure, but it’s worth thinking about.
You’ve got it 100% Andrew as we all await the “blow of top”…..OR – might you consider it’s already happened about 100 SP type points ago?
Personally I’ve got a bit of a different view, but as you suggested – for the few of us, that’s not at all surprising.
I think the market topped in May at 1688.00 if we use SP 500…..then has ditributed / traded flat to “new comer / retail chasers” right straight across until just 17 days ago ( when SP futures where at 1638 ) and now air / fumes / pomo pump pushing the last leg.
It’s funny how people often lose sight of longer term levels if you consider – just “17 days ago” SP was a full 50 points “LOWER THAN MAY HIGH”.
That’s 6.5 months across “and lower” then this latest “stick save”.In my view “no one is in” cuz the retail investor left the building several years ago.
Hey Andrew.
I just found out / read / saw who “Josh Brown” is…..please.
I figured you know me better than that!
He’s one of the “floating heads on CNBC”!! What could he and I possibly see the same / have in common??
He he he he……of course he says its “up up up forever” – he’s paid to say it.
I just heard the same guy on CNBC state that “Spain is now out of reccession!”
Spain out of reccesion!
If I’ve every heard anything more ridiculous well…….well – I haven’t.
The Unemployment Rate in Spain decreased to 25.98 percent in the third quarter of 2013 from 26.26 percent in the second quarter of 2013.
25 % unemployment in Spain! and no reccession?
Wow….turn off the tube man.
Not citing for a market call, just for the statistic that the retail investor has not yet bought into the rally, which I believe you agree with. Are you aware of any major market top that happened where the retail investor had such little participation? I don’t know whether there is an example and certainly would like to know if there is. I’m not saying there won’t be a multi-month pull back coming and I’m expecting one soon. But a major market top and a subsequent massive bear market coming with such a low number of retail bag holders. Has that ever happened?
Great point Andrew – and you’ve got it……it’s not your “fathers market” that’s for sure.
I don’t spend alot of time looking for similarities in the past (considering these unprecedented times of Central Bank intervention) so in that sense again – you’ve got it. This “isn’t” like any time prior.
I originally envisoned charts for 2013 – 2015 looking more like a kid sitting at the kitchen table with a box of crayolas.
Lots of squiggly lines.
In looking at it like a “sideways grind” equal opportunites “should” be available to both bulls and bears ( and as seen thru my trading ) so I guess the key is – pick a direction and do what you can to find “enough of it in a row” – to squeek out alive – and hopefully profitable.