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As stated in our recent technical write up, EURJPY bulls manage to break out above major resistances of 113.946, 116.250, & 121.526, Current upswings consistently well above DMAs and sustain above these levels would take us to the newer heights.
Today, all focus will also be on the long-awaited ECB meeting. We expect the ECB to announce a six-month extension of its QE program and maintain monthly purchases at EUR80bn. This is probably close to market expectations given a recent Bloomberg survey, where 64% of analysts expected a QE extension with the current pace kept unchanged.
The reason why ECB is widely expected to extend the purchases is that inflation is still not on a sustained path towards 2% despite the latest increase, which is due to energy price inflation (core inflation has remained constant since August).
The market focus has over the past couple of months been focused on the risk of 'tapering' or 'end of easing'. However, in our view, that is premature and we do not expect the ECB to announce any kind of tapering at this meeting.
Instead, focus is likely to be on potential changes to QE buying restrictions like the issuer limit, buying below the deposit floor at -0.40% or potential deviations to the capital key.
The positively skewed 2m ATM IVs would still keep us alerted on downside risks.
As a result of the short-term bullish trend and any bearish pressures caused by the European central bank, we devise below option strategy in order to monitor both puzzling swings.
The diagonal bear put spread strategy is recommended that involves buying long-term puts and simultaneously writing an equal number of near-month puts of a lower strike.
As shown in the diagram, the strategy is constructed at net debit but with a reduced cost by writing (1%) 1m OTM put option, simultaneously, buying (1.5%) 2m ITM +0.67 delta put options.
This strategy is typically employed when the options trader is bearish on EURJPY spot FX over the longer term but is neutral to mildly bullish in the near term that is stated above.
