Euro Showing Divergent Price Action in EUR/USD, EUR/JPY

2016-07-18 13:02:00 James Stanley

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Talking Points:

- A failed coup over the weekend in Turkey highlights the potential for increased geopolitical risk in capital markets.

- The Euro is showing divergent price action setups against USD and JPY, with EUR/USD showing a bearish price action formation while EUR/JPY is putting in bullish overtones on respective 4-hour charts.

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While the early portion of this week is relatively mild on the macroeconomic data front, the ECB rate decision on Thursday combined with a continuation of U.S. earnings reports will likely be major focal points for global markets to open the week. But the larger potential for volatility will likely be driven by a recent up-tick in geopolitical risk, as a furthering of this theme could denominate volatile price action across capital markets. The weekend coup in Turkey is continuing to provide some risk factors despite its apparent failure, as President Erdogan’s response to the coup has raised some eyebrows. And with Turkey’s key role as a part of NATO, the fight against terror and as a focal point for European immigration - political volatility in the country can have large ramifications for the rest of the Western World. This is still a very new development and it can be difficult to estimate exactly how this might continue to transpire, but already we’ve seen some impact in the Turkish Lira and even the Euro.

Ahead of the ECB’s rate decision on Thursday we’ve seen divergent moves take place in key pairs of EUR/USD and EUR/JPY; and for traders looking to take a stance on the Euro in the week of some enhanced data risk there could be a setup on either side, or perhaps even hedged-exposure setup potential.

On the bearish side of the Euro, we’ve just seen EUR/USD break below a bear-flag formation on the 4-hour chart. We’re just about 100 pips below the 1.1150 psychological level as of this writing, and price action has been attempting to carve-out a ‘lower-high’ in the 1.1075-region on the under-side of the recent bear-flag in the pair. In EUR/USD, we’ve broken below the 7/13 swing-low in the pair.

Created with Marketscope/Trading Station II; prepared by James Stanley

And on the bullish side of the Euro, Yen weakness from last week’s developments in Japan have continued to show bullish overtones in EUR/JPY. While Friday’s gasp of Euro-weakness hit in EUR/JPY as well, it merely brought price action to a lower-high as opposed to the channel break + lower-low that was seen in EUR/USD. For traders looking at bullish setups in the Euro or even just areas of continued potential weakness in the Yen on the back of continued anticipation of even more Japanese stimulus, this could be a candidate with eyes on the 115.37 level of support, which is the 61.8% retracement of the ‘Abe-move,’ taking the low set in Q3 2012 just ahead of Mr. Abe’s election win to the highs set in 2014. Perhaps more importantly, this level has provided prior price action inflections indicating that other market participants are watching this level. For more details on this setup, please read our Technical Analysis piece on EUR/JPY entitled, 4-Hour Chart Showing Fresh Trend Potential.