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EUR/JPY Technical Analysis: Supported after Shredding Lower

EUR/JPY Technical Analysis: Supported after Shredding Lower

2016-02-17 19:55:00
James Stanley, Currency Strategist
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Talking Points:

  • EUR/JPY Technical Strategy: Previous short all targets cleared; standing pat for now until clearer setup presents itself.
  • EUR/JPY has seen massive volatility around the negative rate announcement, but continued support at 126 could make pressing the short-side difficult.
  • EUR/JPY is extremely volatile. If trading this pair, risk management should be stellar because it can be an unforgiving market. Click here to access our Traits of Successful Traders research.

Our last setup in EUR/JPY limited out really quickly with the final target at 126.15. And this is likely for good cause, as price action bottomed-out just below that level of support, and has since been unable to break lower. As we outlined in our previous article, this increase in volatility is likely related to the recent move by the Bank of Japan to go to negative rates, which Europe has been using for over a year now.

This essentially sets up the macro outlook on EUR/JPY as a play on which currency can be more successfully weakened by their representative Central Bank. This comes down to the ECB versus the Bank of Japan, and frankly, the issues and problems in Europe, comparatively, likely carry more risk. So we’ll probably see the ECB with more latitude to go deeper into negative territory without the fear of reprisal from the G8 group of nations set to meet later in May in Japan. This actually happened three years ago as Shinzo Abe was just getting Abe-nomics started in Japan. Hope reigned supreme and Yen weakness became the predominant FX-theme around-the-world. But the G8 group of nations warned the Bank of Japan against ‘beggar thy neighbor’ strategies that purport to use export-led recoveries. Europe, on the other hand, is in a far more precarious position and will likely face lessened resistance towards even deeper negative rates.

Regardless of that fact, with a currency pair sitting so near well-tested support and given the plethora of issues taking place in the representative economies, risk-reward can be difficult to justify given the limited up-side. This could open the door for top-side reversal plays off of the 126 level, but given the veracity of the down-trend in EUR/JPY, that could be a daunting reversal position. Alternatively, those looking to trade breaks to new lows could certainly look for continuation, but if that’s the case the trader is likely going to want to use breakout-based risk management. We discuss such an approach in the article, The Ballistics of Breakouts.

Outside of those two scenarios, a clean setup does not currently exist to the short-side as risk-reward is unattractive until new lows come into play.

EUR/JPY Technical Analysis: Supported after Shredding Lower

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

--- Written by James Stanley, Analyst for DailyFX.com

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