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With the European Central Bank meeting tomorrow, EUR is in play. EUR/JPY in particular has been confined within a narrow 200 pip range for the past 3 days between 136 and 138, making the currency pair prime for a breakout. Central bank rate decisions are the perfect catalyst for big moves even if the ECB does not change interest rates. Every month the head of the ECB delivers a press conference where he provides his latest economic and monetary policy outlooks. Mario Draghi’s comments almost always move the euro as traders express their enthusiasm or disappointment with the central bank’s views. EUR/JPY’s reaction to Draghi will depend on whether he acknowledges the recent economic improvements in the economy or ignores them again. Having only strengthened their forward guidance last month, the central bank will be wary of sounding overly optimistic and risk driving rates higher. The odds favor EUR/JPY negative comments from the ECB but most market participants expect the central bank to be dovish so any hint of optimism could send EUR/JPY sharply higher.
Based on our Double Bollinger Bands, EUR/JPY is deep in sell-zone territory. This means that further losses are likely as long as the currency pair holds below the first standard deviation Bollinger Band at 138.55. If this level is broken, EUR/JPY could extend to 140. On the downside, 136 is near term support for the currency and if breaks this level, there is no major support until 134.