Aussie Wins The Asian Session; EUR/JPY Resumes Downtrend

The dollar traded on the soft side today as it returned some of its recent gains versus other majors. The euro climbed above the 1.32 level, but ran into some sell orders in the 1.3215-20 area. The USD/JPY was kept under the 104 level after it fell as low as 103.67. It then rebounded to around 103.75-80.

Recent action is unlikely to dissuade US dollar bulls, as one could claim it is part of a healthy process of correcting the overbought conditions that were present previously regarding the greenback.

The euro in particular is at the center of attention as there is intense debate on what the ECB will do next following Draghi’s comments at Jackson Hole about the lowering of inflation expectations. Bets that the European Central Bank will be more aggressive in using monetary stimulus, have pushed down bond yields (long-term interest rates) to record lows in the Eurozone. The ECB meets next week.

Today’s preliminary German inflation numbers for August as well as tomorrow’s Eurozone flash inflation estimate for the same month will give some important fresh clues as to what is happening with inflation in the single currency area and if further stimulus is required. As the ECB sees price stability as its single most important priority, it would like to prevent deflation, hence the possibility of new action increases with every low inflation number.

The Aussie was the winner of today’s Asian session as it was helped by stronger-than-expected business investment plans. It rose to as high as 0.9373 against the US dollar before coming back to 0.9354. Business investment has taken a hit following the end of the mining investment boom, but other sectors seem to be taking up the slack. The aussie also capitalized on a moment of US dollar weakness.

EUR/JPY falls back into downward channel

After a false breakout above the downward channel, the EUR/JPY resumed its downtrend within it. The Ichimoku cloud has proven to be strong resistance as prices tested it at the 138.00 level and have since endured losses down to 136.73. Next major support is seen at 135.70 which is the August 8 low (a 9-month low).

EUR/JPY is trading back below the 23.6% Fibonacci retracement level of the 143.46 (April 2) – 135.71 (August 8) downleg. This shows strong weakness in the market. RSI is back in bearish territory as well. The daily Ichimoku cloud is falling, highlighting the bearish market structure.