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Analyst Pick: EUR/JPY Well-Positioned for a Rough End-of-Year

Analyst Pick: EUR/JPY Well-Positioned for a Rough End-of-Year

EUR/JPY's technical outlook remains structurally weak, and given recent shifts in central bank rhetoric on both sides of the pair, a weak end-of-year could be in the cards. The reaffirming of the recent break in prices this week reinforces our initial approach to the pair when we first discussed it 10 days ago in the article, "Risk/Reward of USD/JPY Long Not Appealing as Short EUR/USD," and the follow up report, "EUR/USD, EUR/JPY Eye Further Losses after Flag Breaks." Watch the videos in the articles for the overview.

Similarly, we posted the following chart on TradingView on November 10 (click the play button for the chart to update recent price action and see how the market developed since the chart was originally posted; visit the link at the start of this paragrah if not applicable on your browser):

At the time, our outlook was, "With USD/JPY trading up towards its former trendline support and EUR/USD's bear flag still biased lower, one pair that should draw interest in the coming days is EUR/JPY.

"EUR/JPY lost the ¥133.10/50 support region of its consolidation triangle (tests of support came in May, July, September, and October) on October 27, after the ECB's shift in policy. With price having thus treated the ¥133.10/50 region as resistance since October 27, it appears an exit from the triangle to the downside is developing.

"The bearish momentum profile on the EUR/JPY daily chart is improving. Price remains below its daily 8- and 21-EMAs, and both indicators, Slow Stochastics and MACD , have recently made moves into oversold/bearish territory; Stochastics have been oversold since October 27; and MACD has been diverging negatively since the ECB meeting on October 22."

The original outlook from 10-days ago remains intact as price has proceeded to fall by -0.89% from ¥131.87 to ¥130.70 on the weekly close. On the daily timeframe, remains below its 8- and 21-EMAs; and both indicators, Slow Stochastics and MACD, have recently reissued sell signals while already nestled in bearish territory.

A continuation effort lower may be emerging, and the next leg should begin anew below this week's swing low of ¥130.64, ultimately seeking a drop towards the yearly low of ¥126.08. In context of the latest moves in EUR/USD and EUR/GBP, the entire EUR-complex is looking rather soft on approach to the pivotal December 3 ECB meeting.

Read more: Draghi’s Dovish Reminder Keeps EUR/USD Downtrend Intact

--- Written by Christopher Vecchio, Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.