EUR/JPY: Dovish ECB shorts hopeful of a G20 blow-out

• EUR/JPY downside risks are compelling fundamentally ahead of G20 and EZ CPI.
• EUR/JPY is technically bound to the 119.91 78.6% Fibonacci retracement level.

EUR/JPY is a pair to watch over the next 24 hrs considering the recent switch at the ECB and tomorrow's CPI data while at the same time, the Yen will catch a bid on risk off flows as we head into the G20 and summit between Trump and Xi.

EUR/JPY has been sliding in recent trade. The cross has scored a low of 122.40 from a high of 122.89. The Euro is a sell on rallies considering the ECB’s dovish pivot in early June which has not only galvanised the lower-for-longer rate view but has also portending a rise in financial repression. Moreover, Eurozone sentiment has weakened significantly this month with a marked drop from 105.2 to 103.3 in June which has rounded out a weak quarter for the eurozone economy and can be seen as further justification for ECB action in July.

"With about a month to go before the July ECB meeting, evidence of weak growth environment keeps mounting," analysts at ING Bank confirmed:

"It's not just a weak growth picture that the ESI paints today which is concerning for the ECB, but take a look at selling price expectations, which have dropped significantly for manufacturing and remained stable in the service sector. This adds to the bleak outlook for price growth in the coming months and without significant improvements in data in the coming month, the ECB stands ready to act."

G20 risk-factor

Meanwhile, we have already seen some softness creeping back into global equities as we head into the G20 this weekend. The Wall Street Journal reported that China wants to make sure that the U.S. remove its ban on the sale of U.S. technology to Huawei Technologies Co. as a precondition in trade talks. Furthermore, President Xi is said to take a "confrontational tone" with Trump.  Chinese news outlet Global Times argued that President Trump's bullying tactics, such as threatening to introduce new tariffs on Chinese imports, would impact this weekend's talks negatively. Further comments from reported to come from U.S. officials in recent trade say they're not expecting any trade breakthrough in talks with President Xi and it's unlikely they'll agree to any request to lift the ban on Huawei products. 

FX implications

 Flash CPI for the EU and the subsequent Core CPI measure is expected to edge up to 1.0% from a prior of 0.8%.  At this juncture, the downside in the cross is indeed compelling and anything better than expected in tomorrow's CPI is likely a sell on euro rallies.

EUR/JPY levels

"It traded through BUT did not CLOSE below the 2019 uptrend and this suggests some near term strength (corrective only) and we would allow for a retest of the 38.2% retracement at 123.10 and possibly the 55 day ma at 123.28," analysts at Commerzbank argued:

"It should fail here and then head to the 119.91 78.6% Fibonacci retracement. This is the last defence for the 117.85 January spike low. Resistance is offered by the 123.75, May 21 high and this maintains an overall negative bias and protects 125.52 78.6% retracement and the 200 day ma at 126.00."