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EUR/JPY Price Plummets Through Fibonacci Support

EUR/JPY Price Plummets Through Fibonacci Support

2018-08-13 17:21:00
James Stanley, Currency Strategist
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EUR/JPY Talking Points:

- EUR/JPY has put in a rather outsized bearish breakout from the Fibonacci level that we had looked at last week. Prices in the pair sold-off by as much as 430 pips, but sellers got shy ahead of a test of the 125.00 level, and prices have started to pullback.

- At this point, the move could still be qualified as being stretched; but if we do see resistance show around prior areas of support around 127.50 or the 128.52 Fibonacci level we had looked at last Wednesday, the door can remain open for more downside.

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the Euro or the Japanese Yen? Check out our IG Client Sentiment Indicator.

EUR/JPY Bearish Breakout From Fibonacci Support

It’s been an active past couple of trading days in the Euro, as markets get a bit more cautious on the prospect of contagion in European banks from the developing situation in Turkey. While the single currency had continued to hold on to weakness from Q2, taken from the dual impacts of a dovish ECB along with increased political pressure from Italy, a new risk has come up, and that’s just how exposed banks European banks might be to the continued development of what’s taking place across the European border in Turkey. And, as we saw in the European financial collapse, the big concern isn’t just one or two banks facing hardships, as the European banking system is likely too connected for just a couple of banks to absorb all of the pain: The worry is about contagion, one or two banks unable to meet obligations then pushing other counter-parties over the edge, to the point where credit freezes as the banking system gets very risk averse very, very quickly.

At this stage, we’ve seen an increase in worry as indicated by the continued sell-off in the Euro. Just last week, we looked at EUR/JPY running into a key area of Fibonacci support. And while a support level of that nature can often be used for reversal strategies, we advised against looking for such, instead looking for a bearish breakout to fresh lows. That breakout started on Thursday and has pretty much continued ever since, seeing prices shed as much as 430 pips from the Wednesday high down to today’s low.

EUR/JPY Four-Hour Price Chart

eurjpy eur/jpy four hour price chart

Chart prepared by James Stanley

Given our current backdrop, traders should be cautious of selling an oversold move. We saw a similar run of bearish price action in late-May all the way down to the 125.00-handle; but that’s around the time that bulls came back into the market and two weeks later we were right back up to the 130.00 level. This morning’s support pulled up just shy of that 125.00-handle, and the fact that sellers couldn’t continue to push for a re-test of the psychological level makes themes around bearish momentum a bit less attractive.

EUR/JPY Eight-Hour Chart: Sellers Relent Ahead of Big Support Test

eurjpy eur/jpy eight hour price chart

Chart prepared by James Stanley

EUR/JPY gapped-lower to open this week’s trading, and that move of weakness continued for the first few hours until a bit of support began to develop around 125.25. Since then, we’ve seen a continued push of bullish short-term price action, and this indicates that we may have a deeper retracement to work with in that bigger-picture bearish move. This also exposes the potential for resistance to come into play, and that can open the door for bearish continuation strategies in the pair.

The same Fibonacci level we had looked at for support last Wednesday could be re-utilized as potential resistance, and between that level and current prices we have a second area of interest around the 127.50 psychological level (marked from 127.24 up to 127.50 on the below chart). The area around 127.50 had helped to carve out support for a two-week period in the second half of June and since the recent sell-off has heated up, we have yet to see a resistance test at this prior area of support.

EUR/JPY Four-Hour Price Chart: Lower-High Resistance Potential From Prior Points of Support

eurjpy eur/jpy four hour price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

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

Contact and follow James on Twitter: @JStanleyFX

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

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