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Talking Points:
- EUR/JPY Technical Strategy: Still in the aftermath of a momentous drop in prices on the back of Brexit.
- After such an out-sized directional move, traders need to be on guard against strong retracements before staging continuation plays.
- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.
In our last article, we looked at the prospect of re-loading in the down-trend being seen in EUR/JPY, with an especially interested eye watching the 115.00-115.37 zone of potential resistance for down-side continuation entries. And while last week did bring some strength into the pair after a dramatic drop in the week prior, the swing-high topped out at 114.80 before aggressive price action lower came back-in this morning.
At this stage, the macro-trends in both the Euro and Yen are fairly clear. The Euro is continuing to drive lower on the back of increased risk around the Brexit Referendum with the additional fear that this summer may bring more referendums from more voter bases throughout Europe. A fragile Italian economy will be put to the test later in the year when Italy begins a referendum on Constitutional reform, which is widely being seen as a make-or-break moment for Italian Prime Minister and supporter of further European integration, Matteo Renzi. Meanwhile the risk aversion on the back of Brexit and increasing nationalism is creating strong capital flows into safe-haven markets such as the Japanese Yen. So both macro-themes for Europe and Japan have been pushing EUR/JPY lower.
This highlights the attractiveness of short EUR/JPY, but this isn’t a sitution to be trifled with. The risk factor here is the prospect of BOJ intervention in the effort of quelling excessive Yen-strength. Both the head of the Japanese Central Bank and the Japanese Finance Minister has made recent comments suggesting that Japanese regulators are watching FX markets, and that one-sided movements in the Yen will not be tolerated. So, as USD/JPY approaches the major psychological level at 100, traders need to remain cautious of comments alluding to intervention threats from Japan. And even without actual intervention from Japan, the simple fact that this could be a theme or a threat may be enough to slow the continued gains in the Yen, at least temporarily as fresh highs are made (lows in USD/JPY, or EUR/JPY).
These are reasons why being patient with the down-side entry, not trying to push too aggressively whilst at lows, and not having to take on too much risk with any single entry can be so incredibly important for a situation such as we have in EUR/JPY at the moment. That prior zone of confluent resistance could still be attractive should price action make a top-side move, but should 114.80 hold as a lower-high point of resistance, traders can look at more near-by entries based around prior price action.
From the level of 113.30 to 113.80 is a zone of prior price action support that could offer continuation entries lower (highlighted with a red box on the below chart). Should price action show resistance in this area, traders can look to lodge stops above the swing high at 114.80 with targets set towards the 76.4% retracement of the 2008 high to the 2011 low in the pair at 112.00. Should this level come into play, traders can then cast secondary profit targets towards the major psychological level at 110.00.
Charts prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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